Carnegie  Endowment  for  International  Peace 


DIVISION  OF   ECONOMICS  AND   HISTORY 

JOHN   BATES  CLARK,    DIRECTOR 


PRELIMINARY   ECONOMIC   STUDIES    OF   THE   WAR 


EDITED  BY 

DAVID  KINLEY 

Professor  of  Political  Economy,  University  of  Illinois 
Member  of  Committee  of  Research  of  the  Endowment 

No.  25 


GOVERNMENT  WAR  CONTRACTS 

BY 

J.  FRANKLIN  CROWELL,  PH.D.,  LL.D. 


NEW  YORK 

OXFORD  UNIVERSITY  PRESS 

AMERICAN  BRANCH:  35  WEST  32nd  STREET 

LONDON,  TORONTO,  MELBOURNE  AND  BOMBAY 

1920 


CI 


COPYRIGHT  1920 

BY  THE 

CARNEGIE  ENDOWMENT  FOR 

INTERNATIONAL  PEACE 

WASHINGTON.  D.  C. 


THE  RUMFORD  PRESS 
CONCORD 


EDITOR'S   PREFACE 

Three  points  stand  out  prominently  in  the  procedure 
described  under  the  name  of  war  contracts.  The  first  is  that 
the  estabHshed  system  of  doing  business  in  the  War  and 
Navy  Departments  broke  down  early  in  the  war.  The  second 
is  that  the  civilians,  expert  and  inexpert,  who  attempted  to 
carry  on  business  which  properly  belonged  to  the  departments, 
where  they  succeeded  at  all  in  doing  better  than  the  depart- 
ments themselves,  did  so  usually  by  violation  of  the  law — 
the  very  law  which,  in  large  measure,  prevented  the  depart- 
ments from  doing  as  well  as  the  civilians  did.  The  third  is 
that  it  was  found  necessary  to  replace  a  bureaucratic  order 
with  the  more  elastic  and  freer  methods  of  private  business. 

The  history  of  war  contracts  shows  clearly  that  there  w^ere 
many  men  in  the  War  and  Navy  Departments  who  were 
entirely  competent  to  foresee  the  needs  of  the  country  in  the 
crisis  and  to  prepare  plans  adequate  to  meet  them.  They 
were  prevented,  however,  from  doing  this  by  the  laws  or 
administrative  regulations  defining  the  scope  of  their  author- 
ity. Therefore,  as  is  usual  at  a  time  of  heated  public  opinion, 
they  were  accused  of  incompetence  because  they  did  not  get 
results  which  they  were  unable  to  get  only  because  this  very 
public  had  insisted  on  tying  them  hand  and  foot.  This  is  a 
commonplace  of  governmental  administration  to  which  pub- 
lic attention  needs  to  be  called  again  and  again. 

To  put  the  matter  in  another  way,  the  public  of  this  coun- 
try is  so  afraid  that  its  servants  may  be  occasionally  dishonest 
that  it  prescribes  in  great  detail  the  methods  by  which  they 
may  do  public  business.  We  have  sacrificed  and  will  always 
sacrifice  efficiency  and  dispatch  for  what  we  think  is  safety. 
Even  when  we  happen  to  get  a  competent  public  servant  for 
the  niggardly  pay  which  the  people  of  the  country  are  willing 
to  give  for  any  public  office,  we  tie  his  hands  in  this  way  and 
make  him  bury  his  talent.  There  were  numerous  cases  of 
this  kind  in  both  the  War  and  Navy  Departments,  and  men 

iii 


Iv  EDITOR  S    PREFACE 

suffered  in  reputation,  not  because  of  their  inability  to  meas- 
ure and  provide  for  enlarged  responsibilities  in  the  crisis,  but 
because  the  public  was  impatient  of  their  inability  to  do  so 
under  the  conditions  that  the  public  had  laid  down.  Criti- 
cism of  departmental  officers  in  the  War  and  Navy  needs  to 
be  temperate  in  the  light  of  this  fact. 

Efficiency  in  the  conduct  of  business  implies  not  only  that 
high  personal  responsibility  but  great  liberty  of  action  is 
assigned  to  those  who  are  charged  with  doing  the  work. 
This  liberty  of  action  we  are  constantly  refusing  to  our  public 
officers  on  the  ground  that  they  will  either  be  corrupt  or  auto- 
cratic. Perhaps  it  is  a  relic  of  the  old  idea  that  anyone  in  a 
democracy  can  do  any  government  job. 

Some  students  of  this  history  may  very  likely  fall  in  with 
the  view  of  those  people  who  would  lay  the  blame  of  our 
failure  to  be  prepared  and  to  push  our  participation  in  the  war 
in  a  more  businesslike  way  on  the  shoulders  of  the  adminis- 
tration and  of  Congress.  Making  allowance  for  all  that  may 
be  charged  to  both  for  short-sightedness  and  unsound  prin- 
ciples of  action,  it  still  remains  true  that  this  kind  of  criticism 
is  too  cheap.  Many  of  those  who  make  it  are  the  very  people 
who  would  have  found  fault  if  money  had  been  expended  in 
preparation  for  war  which  did  not  eventuate,  and  now  find 
fault  because  money  was  not  spent  for  war  that  did  eventuate. 
In  other  words,  they  are  the  people  who  ask  that  their  repre- 
sentatives shall  have  unerring  foresight  and  wisdom.  To  be 
sure,  we  may  fairly  expect  men  who  are  elevated  to  the  high 
ofifice  of  representing  the  people  to  be  men  of  larger  caliber, 
greater  wisdom  and  farther  foresight  than  the  rest  of  us. 
We  get  some  such  in  our  halls  of  legislation  and  of  adminis- 
tration. But  it  is  too  much  to  expect  that  all  of  them  will  be 
so,  especially  when  we  remember  the  niggardly  treatment 
which  this  great  democratic  country  gives  all  its  public 
serv^ants.  We  expect  first  class  men  to  take  first  class  jobs 
at  third  rate  pay,  and  then  abuse  them  if  they  do  their  work 
in  what  is  really  a  first  class  way.  The  public  is  more  largely 
to  blame  for  the  failure  of  the  government  through  recent 


EDITOR  S    PREFACE  V 

years  to  do  its  work  adequately  in  the  way  of  "preparedness" 
than  is  the  government  itself.  Nevertheless,  it  is  true  that 
men  in  public  office  must  be  ready  at  times  to  take  the 
responsibility  of  doing  their  duty  in  ways  that  are  for  the 
public  interest,  even  when  those  ways  are  criticised  by  public 
opinion.  One  who  does  this  is  truly  a  great  public  servant. 
But  he  must  be  strong  enough  to  withstand  criticism  until 
the  event  justifies  his  wisdom. 

Looked  at  in  a  large  way,  the  greatest  lesson  of  our  "war 
contract"  experiences,  in  the  mind  of  the  editor,  is  not  the 
fact  that  we  devised  excellent  business  methods  for  the  dis- 
charge of  the  duties  of  the  government  officers,  even  in  the 
time  of  war,  valuable  and  important  as  those  were.  It  is 
rather  the  fact  that  in  a  large  way  we  can  not  expect  perma- 
nently to  find  business  efficiency,  in  the  sense  in  which  the  best 
organized,  most  honest  and  most  capable  business  men  use 
the  term,  developed  to  a  high  degree  in  a  democratic  govern- 
ment. For  such  efficiency  implies  a  degree  of  autocratic 
authority  in  management  which  the  public  will  not  long 
tolerate.  There  is  a  feeling  that  the  cry  for  business  efficiency 
in  public  administration,  while  easy  to  understand  because  of 
waste  and  mismanagement  in  public  business,  can  not  be 
pressed  too  far  because  of  the  feeling,  almost  instinctive,  on 
the  part  of  the  people  that  this  good  can  be  purchased  only  at 
the  sacrifice  of  some  degree  of  freedom.  In  this  the  public  is 
right.  To  put  the  matter  in  another  way,  we  might  say  that 
the  most  democratic  method  of  doing  business  is  the  old  town 
meeting  plan  of  New  England.  Everybody  takes  part  in  the 
decisions.  But  no  one  would  claim  that  you  can  do  business 
efficiently  in  this  way.  We  can  not  have  the  utmost  of 
democracy  and  the  utmost  of  efficiency  at  the  same  time  in 
the  conduct  of  a  business  operation,  even  if  it  is  a  public  one. 
This  lesson  needs  to  be  taken  to  heart  in  these  days,  particu- 
larly when  there  is  on  the  one  hand  a  demand  for  what  are 
called  business  methods  in  public  administration  and  on  the 
other  a  demand  for  a  wider  participation  in  these  transactions 
on  the  part  of  the  public. 


Vi  EDITOR  S    PREFACE 

The  student  will  find  many  new  illustrations  of  important 
matters  in  this  study  of  Dr.  Cro well's.  He  will  find  illustra- 
tions of  new  methods  of  organization  for  business  purposes 
and  methods  of  expediting  business.  But  our  business  expe- 
rience in  the  war  has  not  added  any  new  fundamental  prin- 
ciple either  to  the  science  of  economics  or  to  the  science  of 
accounting.     None  the  less,  its  lessons  are  highly  valuable. 

David  Kinley, 

Editor. 
University  of  Illinois, 
October  19,  1920. 


FOREWORD 

The  subject  of  contractual  relations  between  government 
and  private  concerns  in  time  of  war  has  as  yet  received  com- 
paratively little  attention.  There  are  a  few  books  on  the 
legal  aspects  of  war  contracting.  But  neither  the  economists, 
with  a  few  exceptions,  nor  the  public  officials  have  given  the 
matter  the  consideration  which  it  seems  to  deserve.  One 
fares  better  in  the  search  for  discussions  of  these  matters  by 
going  to  the  files  of  engineering  journals — an  ever  increasing 
source  of  applied  economics.  Consequently,  this  inquiry  in 
both  its  methods  and  results  has  something  of  a  pioneering 
character  about  it.  The  field  has  impressed  the  author,  for 
many  years  a  teacher  of  economics,  as  having  much  that  might 
be  utilized  with  advantage  in  the  research  work  of  graduate 
instruction,  if  not  even  in  the  more  advanced  courses  of  under- 
graduate instruction  in  quasi-public  economics.  Besides 
being  closely  related  to  engineering,  the  subject  is  neighbor 
to  that  of  accounting.  In  these  three  subjects — of  govern- 
ment contracting,  contract  engineering  and  contractural 
accounting — we  have  a  group  of  economic  literature  repre- 
senting achievements  of  which  the  representatives  of  sci- 
entific economics  are  bound  to  take  early  account  if  the 
latter  subject  is  destined  to  keep  abreast  of  the  progress  of 
economic  research  in  closely  allied  domains  of  enterprise. 

It  has  been  the  purpose  to  keep  clear  the  distinction 
between  the  war  time  and  the  peace  time  contracting,  because 
the  problems  and  the  conditions  afi"ecting  their  solution  are 
different  under  the  two  regimes.  It  is  not  always  easy  to 
detect  where  the  departures  began.  But  the  role  of  the  United 
States  of  America,  as  associated  with  the  Entente  Powers  in 
the  World  War  against  the  Central  Empires  of  Europe,  is 
always  the  essential  viewpoint  from  which  this  exposition 
proceeds.  The  events  cover  the  better  part  of  three  years, 
1917-1919.    The  materials  are  to  be  found  in  the  Congres- 

vii 


Viii  FOREWORD 

sional  proceedings  of  the  period,  in  military  and  naval  records 
and  reports  of  the  several  departments  and  bureaus  concerned 
with  the  war,  in  the  hearings  and  appendices  of  the  several 
special  investigations  and  reports,  in  the  enactments,  resolu- 
tions and  executive  orders  and  in  the  current  discussions  of 
engineering,  aeronautical,  maritime  and  economic  organiza- 
tions among  others.  Reports  and  Minutes  of  the  Council  of 
National  Defense  are  valuable.  Nor  should  the  contents  of 
the  weekly  and  the  daily  newspaper  press  be  overlooked. 
The  more  reliable  issues  are  helpful  in  getting  a  good  grasp  of 
conditions  and  of  events  which  helped  to  shape  contractual 
terms,  systems  and  policies. 

This  task  has  proved  to  be  full  of  dif^culties  and  not  a  few 
discouragements,  owing  mainly  to  the  intricate  and  bewilder- 
ing complexity  of  the  mass  of  materials.  The  lack  of  ready 
access  to  ultimate  sources,  among  other  things,  added  to 
the  burden  of  maintaining  scientific  fidelity  in  a  milieu 
sometimes  surcharged  with  personal  or  partisan  bias.  Under 
these  conditions,  however,  there  has  been  whipped  into  shape 
a  tentati\'e  statement  of  the  working  principles  in  the  light  of 
which  public  policies  were  formulated  and  the  hydra-headed 
problems  of  war  worked  out  as  they  arose.  The  major  part  of 
this  study  has  consequently  had  to  be  descriptive  in  character; 
a  minor  portion  could  be  given  to  rigid  analysis,  and  a  still 
smaller  part  to  the  tempting  formulation  of  the  theoretical 
aspects  of  government  war  contracting.  The  idea  has  been 
kept  in  view  that  descriptive  analysis  should  always  lead  to 
some  helpful  criticisms,  if  not  to  definite  conclusions,  in  order 
that  sounder  methods  of  administration  might  result  from 
the  exposition  of  the  mistakes  and  the  masteries  of  the  past. 
For,  in  the  wide  survey  of  the  entire  panorama  of  this  eventful 
era  in  history  and  economics  the  masteries  of  governmental 
problems  far  outweigh  the  mistakes;  the  patriotic  fruitage  of 
national  fidelity  in  contracting  enterprise  far  outshines  the 
profiteering  exploitation  of  a  war  stricken  citizenship,  and 
moral  worth  triumphs  in  spite  of  unparalleled  material  waste- 
fulness. 


FOREWORD  ix 

For  courtesies  I  am  indebted  to  the  various  bureaus  of  the 
War  and  Navy  Departments,  to  the  committees  of  Congress 
which  had  most  to  do  with  the  war,  to  the  District  War 
Claims  Boards  and  to  many  contractors  communicated  with 
by  letter  or  interview.  Commercial  organizations  have  been 
helpful  in  getting  the  business  view^point,  as  have  also  the 
officials  of  the  district  offices  of  the  Federal  Reserve  Bank. 
To  the  staff  of  the  Free  Public  Library,  East  Orange,  N.  J.,  I 
am  indebted  for  more  than  the  usual  facilities  and  courtesies. 
Use  was  made  of  the  Endowment's  office  rooms  and  library 
at  Washington  while  collecting  public  documents.  For  pains- 
taking care  in  the  preparation  of  the  manuscript,  for  verifica- 
tion of  references  and  for  helpful  suggestions  I  am  sure  that 
this  monograph  owes  most  to  my  wife. 

Congressional  investigations  relating  to  the  war  contributed 
the  larger  volume  of  information  and  opinions.  From  these 
the  following  may  be  mentioned  as  the  more  important  sources 
of  research  material : 

Investigation  of  the  War  Department:  Hearings  before  the  Committee  on  Military 
Affairs,  United  States  Senate,  65th  Congress,  second  session,  inquiring  into  progress 
made  in  providing  for  ordnance,  small  arms,  munitions,  etc.  Begun  December 
12,  1917,  and  extending  into  1918. 

United  States  Shipping  Board  Emergency  Fleet  Corporation:  Hearings  before 
the  Committee  on  Commerce,  Senate,  65th  Congress,  second  session,  on  Senate 
Resolution  170,  to  investigate  matters  relating  to  the  building  of  merchant  vessels 
and  report  findings.  Begun  December  21,  1919.  Two  main  volumes  indexed. 
Volume  8,  illustrated. 

Aircraft  Production:  Hearings  before  the  Subcommittee  of  Senate  Committee 
on  Military  Affairs,  65th  Congress,  second  session.  Begun  May  29,  191 8.  Two 
volumes. 

Report  of  Senator  Charles  S.  Thomas,  from  the  subcommittee  of  the  Senate 
Committee  on  Military  Affairs,  August  22,  1918,  under  Senate  Resolution  of  April 
30,  1918,  19  pages,  pursuant  to  Sen.  Res.  48,  on  "Aircraft  Production  in  the 
United  States."     Senate  Report  No.  555,  65th  Congress,  second  session. 

Ex- Justice  Hughes's  Report  and  Recommendations  on  Aircraft  Production  Inves- 
tigation, transmitted  to  Attorney  General  Gregory  October  25,  1918.  Reprinted 
as  Appendix  A  to  The  Congressional  Record,  December  30,  191 8,  pp.  883-914. 
Gives  history  of  government's  aircraft  administration,  analyzes  contracts  and 
summarizes  causes  of  delay  in  production.     The  best  single  summary  available. 

Operations  of  the  U.  S.  Housing  Corporation:  Hearings  before  the  Subcommittee 
of  the  Senate  Committee  on  Public  Buildings  and  Grounds,  65th  Congress,  second 
session,  pursuant  to  Sen.  Res.  371,  to  report  on  costs,  construction,  operation, 


X  FOREWORD 

maintenance  and  future  disposition  of  public  buildings,  etc.  Parts  i  ff.  Begun 
December  6,  191 8. 

Hearings  on  Public  Buildings  and  Grounds:  House  Committee  hearings  on  Sen. 
Res.  194,  directing  U.  S.  Housing  Corporation  to  suspend  work  on  buildings 
where  construction  is  not  over  75  per  cent  completed  and  to  cancel  contracts,  etc. 
Begun  January  8,  1919. 

Relative  to  Contracts:  Hearings  before  the  House  Committee  on  Military  Affairs, 
65th  Congress,  third  session,  on  House  Bill  No.  13,274,  to  provide  relief  where 
formal  contracts  have  not  been  made  in  the  manner  required  by  law.  Begun 
December  9,  191 8.     Pp.  34.     Testimony  of  Crowell,  Goethals,  etc. 

Hearings  on  Hitchcock  Bill,  Sen.  5,261,  before  Senate  Committee  on  Military 
Affairs,  January  7,  1919,  on  acquiring  lands  for  establishment  of  mobilization 
and  training  fields  for  artillery  and  small  arms,  including  testimony  of  Secretary  of 
War.     Pp.  59. 

War  Expenditures:  Hearings  before  the  Select  Committee  on  Expenditures  in 
the  War  Department,  including  five  subcommittees  on  Aviation,  Camps,  Foreign 
Expenditures,  Quartermaster's  Corps,  and  Ordnance.  Sixty-sixth  Congress,  first 
session.  Begun  June  23,  1919,  and  continued  during  1919.  Published  in  pam- 
phlet form  for  distribution,  and  numbered  as  Serials  and  Parts,  as  "Aviation, 
Serial  i,  Part  I." 

For  a  large  part  of  the  information  here  presented  these 
several  documents  have  served  the  author's  purpose.  The 
testimony  is  usually  of  a  first-hand  character,  by  the  official 
in  authority  on  that  particular  division  of  service.  Easily 
the  most  voluminous  source  is  the  hearings  last  mentioned,  on 
war  expenditures.  In  fact,  this  testimony  on  the  several 
matters  of  military  interest  covers  practically  every  one  of  the 
maj'or  fields  of  inquiry  relating  to  the  war.  It  has  been  prac- 
ticable to  do  no  more  than  refer  to  some  of  the  most  inform- 
ing testimony,  owing  to  the  limitations  of  this  monograph. 
These  documents  are  literally  mines  of  information  on  war 
conditions  as  they  affect  contract  relations,  conditions  of  pro- 
duction, methods  of  settlement,  etc. 

From  all  of  these  and  other  documentary  sources  one  thing 
stands  out  in  bold  relief,  namely,  that  Congress  exercised  its 
influence  on  the  conduct  of  the  war  not  on  the  military  side 
but  preeminently  on  the  side  of  its  economics.  And  in  this 
respect  its  influence  was  felt  in  three  main  directions: 

I.  In  historic  enactments  providing  for  raising  revenues 
and  the  appropriation  of  funds  on  a  scale  never  before  under- 
taken by  any  government. 


FOREWORD  XI 

2.  In  promoting  the  work  of  equipping  the  army  by  prompt 
investigation  of  abuses,  delays  and  official  inefficiency  in 
business  operations,  as  criticism  of  these  and  other  conditions 
were  reflected  into  the  legislative  branches  of  government; 
and  in  applying  correctives  where  practicable. 

3.  By  investigating  conditions  at  the  end  of  the  war,  as  to 
the  transition  to  peace  and  the  liquidation  of  war  assets,  so  as 
to  formulate  sound  policies  and  enforce  prompt  adjustment, 
along  lines  of  economic  sanity  and  political  safety. 

John  Franklin  Crowell. 


CONTENTS 


Part  I — War  Contract  Conditions 

CHAPTER  PAGE 

I     Distinctive  Character  of  Go\ernment  Contracting  3 

II     Government  Contracts  in  the  World  War 8 

III  Principles  of  Procedure  in  War  Contracting 13 

IV  Rise  and  Fall  of  Extra-Departmental  Contracting  27 

V  Types  and  Forms  of  W^ar  Contracts 31 

VI     Commandeering  as  a  Means  of  Supply  Control ...  42 

VII     Contractual  Role  of  the  Council  of  National  De- 
fense    52 

Part  II — War  Contract  Operations 

I  Army  Supply  Orders  and  Contracts — Quartermas- 

ter, Engineer  and  Medical 63 

II  Emergency  Construction  Contracts  on  Cost-Plus 

Plan 74 

III  Why  the  Cost  Plus  Percentage  Fee  was  Adopted .  .  81 

IV  Selection  of  Contracts  under  the  Fee  System 86 

V  Did  the  Emergency  Construction  Contracts  Make 

Good? 92 

VI     Army  Ordnance  Contracts 96 

VII     Analysis  of  Standard  Ordnance  Contracts 107 

VIII     Control  of  Costs  in  Ordnance  Contracts 116 

IX     A  Typical  Ordnance  Contract— Service  Rifles 121 

X     Some  Notable  Features  of  the  Rifle  Contracts.  ...  130 

XI     War  Contracts  W'ithin  the  Navy 135 

XII     Navy's  Earlier  Uses  of  Cost-Plus  Contracts 137 

XIII  Standard  Manufacturing  Cost-Plus  Contract  in  the 

Navy 144 

XIV  Navy's  Procedure  to  Forestall  Profiteering 150 

XV     Standard  Contracts  Adjusted  to  Changed  Condi- 
tions    159 

XVI     W^ar    Contracts    of    the    United    States    Shipping 

Board 169 

XVII     Kinds  of  Contracts  by  the  Fleet  Corporation 183 

xiii 


XIV 


CONTENTS 


XVIII     Salient  Features  of  Shipbuilding  Contracts 189 

XIX     Compensation  in  Requisitioned  Ship  Program ...  .  198 

XX     Contractors'  Fees  in  Fabricated  Shipbuilding ....  209 

XXI     Extent  of  Subcontracting  in  Fabricated  Ships.  .  .  .  219 
XXII     Profiteering    versus    Patriotism     in    Hog     Island 

Project 223 

XXI II  Policy  and  Practice  in  VVooden  Shipbuilding  Con- 

tracts   227 

XXIV  Aircraft  Production  Contracts 231 

XXV     Contractual  Maladjustment  in  Aircraft  Relations  243 

XXVI     Essential  Aspects  of  Airplane  Spruce  Contracts .  .  .  253 

XXMI     Government  Contracts  for  Housing  War  Workers  263 

XXVIII     Cost  Keeping  Methods  on  Housing  Projects 275 

XXIX     Housing    Contract    Policy    As    Affected    by    the 

Armistice 284 

Part  III — Liquidation,  Cancelation  and  Adjustment 

I     Liquidation  of  Contractual  Assets 287 

II     Cancelations  of  Orders  and  Contracts 305 

III  Postarmistice  Methods  of  Adjusting  Disputes.  ...  312 

IV  Summary  and  Conclusions 333 

Index 353 


GOVERNMENT  WAR  CONTRACTS 


PRELIMINARY  ECONOMIC  STUDIES  OF  THE  WAR 
EDITED   BY   DAVID   KINLEY 

Professor  of  Political  Economy,  University  of  Illinois 
Member  of  Committee  of  Research  of  the  Endowment 

1.  Early  Economic  Effects  of  the  War  upon  Canada.     By  Adam  Shortt,  formerly  Commis- 

sioner of  the  Canadian  Civil  Service,  now  Chairman,  Board  of  Historical  Publications, 
Canada. 

2.  Early  Effects  of  the  European  War  upon  the  Finance,  Commerce  and  Industry  of 

Chile.     By  L.  S.  Rowe,  Professor  of  Political  Science,  University  of  Pennsylvania. 

3.  War  .Administration  of  the  Railways  in  the  United  States  and  Great  Britain.      By 

Frank  H.  Di.xon,  Professor  of  Economics,  Dartmouth  College,  and  Julius  H.  Parmelee, 
Statistician,  Bureau  of  Railway  Economics. 

4.  Economic  Effects  of  the  War  upon  Women  and  Children  in  Great  Britian.     By  Irene 

Osgood  Andrews,  Assistant  Secretary  of  the  American  Association  for  Labor  Legislation. 

5.  Direct  Costs  of  the  Present  War.     By  Ernest  L.  Bogart,  Professor  of  Economics.  Univer- 

sity of  Illinois. 

6.  Effects  of  the  War  upon  Insurance    with  Special  Reference  to  the  Substitution 

OF  Insurance  for  Pensions.      By  William  F.  Gephart,  Professor  of  Economics.  Wash- 
ington University,  St.  Louis. 

7.  The  Financial  History  of  Great  Britain,  1914-1918.     By  Frank  L.  McVey.  President, 

University  of  Kentucky. 

8.  British  War  .\dministr.\tion.     By  John  A.  Fairlie,  Professor  of  Political  Science,  Univer- 

sity of  Illinois. 

9.  Influence  of  the  Gre.\t  War  upon  Shipping.     By  J.  Russell  Smith,  Professor  of  Industry,. 

University  of  Pennsylvania. , 

10.  War  Thrift.     By  Thomas  Nixon  Carver,  Professor  of  Political  Economy,  Harvard  Univer- 

sity. 

11.  Effects  of  the  Great  War  upon  Agriculture  in  the  United  States  and  Gre.\t  Britain,. 

By  Benjamin  H.  Hibbard,  Professor  of  Agricultural  Economics,  University  of  Wisconsin. 

12.  Disabled  Soldiers  ant)  Sailors— Pensions  and  Training.      By  Edward  T.  Devine,  Pro- 

fessor of  Social  Economy,  Columbia  University. 

13.  Government  Control  of  the  Liquor  Business  in  Great  Britian  and  the  United  States. 

By  Thomas  Ni.xon  Carver,  Professor  of  Political  Economy,  Harvard  University. 

14.  British  Labor  Conditions  and  Legislation  during  the  W.\r.     By  Matthew  B.  Hammonds 

Professor  of  Economics,  Ohio  State  University. 

15.  Effects  of  the  War  upon  Money,  Credit  and  Banking  in  Fr.\nce  .\nd  the  United 

States.     By  B.  M.  Anderson,  Jr.,  Ph.D. 

16.  Negro  Migration  during  the  W.\r.     By  Emmett  J.  Scott,  Secretary-Treasurer.  Howard 

University,  Washington,  D.  C. 

17.  Early  Effects  of  the  War  upon  the  Finance,  Commerce  and  Industry  of  Peru.     By 

L.  S.  Rowe,  Professor  of  Political  Science,  University  of  Pennsylvania. 

*i8.  Govern-ment  Control  and  Operation  of  Int)ustry  in  Great  Britain  and  the  United 
States  During  the  World  War.     By  Charles  Whiting  Baker,  Consulting  Engineer. 

19.  Prices  and  Price  Control  in  Great  Britain  and  the   United   States   during  the 
World  War.     By  Simon  Litman,  Professor  of  Economics,  University  of  Illinois. 

*20.  The  Relation  of  the  Economic  and  Social  Conditions  in  Southe.\stern  Europe  and  in 
Alsace-Lorraine  to  Conditions  of  Peace.  Two  volumes.  By  Stephen  Pierce  Dug- 
gan.  Professor  of  Education,  College  of  the  City  of  New  York. 

*2r.  The  Germans  in  South  America:  A  Contribution  to  the  Economic  History  of  the 
World  War.     By  C.  H.  Haring,  Associate  Professor  of  History,  Yale  University. 

♦22.  Effects  of  the  War  on  Pauperism,  Crime  and  Programs  of  Social  Welfare.  By  Edith 
Abbott,  Lecturer  in  Sociology,  University  of  Chicago. 

23.  Mo.netary  Conditions  in  War  Times  in  India,  Mexico  and  the  Philippines.     By  E.  W. 

Kemmerer,  Professor  of  Economics  and  Finance,  Princeton  University. 

24.  Direct  and  Indirect  Costs  of  the  Great  World  War.     By  Ernest  L.  Bogart,  Professor 

of  Economics,  University  of  Illinois.     (Revised  edition  of  Study  No.  5.) 

25.  Govern.ment  War  Contracts.     By  J.  Franklin  Crowell,  Ph.D.,  LL.D. 
♦26.  Cooperative  Movement  in  Russia.     By  E.  M.  Kayden. 

THE  CARNEGIE  ENDOWMENT  FOR  INTERNATIONAL  PEACE 

2  JACKSON  PLACE,  WASHINGTON,  D.  C. 
*  These  numbers  have  not  yet  been  published. 


PART  I— WAR  CONTRACT  CONDITIONS 

CHAPTER  I 
Distinctive  Character  of  Government  Contracting 

Payments  arranged  by  contract,  even  in  ordinary  times, 
comprise  a  major  portion  of  the  annual  disbursements  of  mod- 
ern governments.  In  times  of  peace  these  pubHc  engage- 
ments in  volume  of  transactions  give  to  national  governments 
a  place  of  primacy  among  the  purchasers  of  the  products  of 
industry  and  the  services  of  men  and  women.  When,  how- 
ever, the  making  of  war  becomes  the  main  business  of  the 
state,  the  proportionate  importance  of  the  government's 
contractual  relations  with  the  business  world  overshadows 
every  other  material  consideration.  Here  we  have,  on  the 
one  hand,  the  mobilizing  of  the  actual  and  potential  economic 
resources  of  the  belligerent  nation;  on  the  other  hand,  the 
military  and  naval  organization  and  operations  in  all  their 
complexity.  Between  them  the  war  contracting  relations 
stand  as  the  bridge  by  which  the  man  power  and  the  materials 
are  coordinated  and  converted  into  the  means  of  public  defense 
and  destruction  of  the  public  enemy. 

This  vital  role  of  government  war  contracts  has  not  been 
fully  enough  appreciated  in  the  study  of  the  conditions  and 
causes  that  lie  back  of  the  phenomenon  of  wars.  Failure 
duly  to  appraise  the  contractual  relations  of  governments  in 
times  of  peace  is  possibly  responsible  in  the  main  for  the  almost 
total  absence  of  treatment  of  the  subject  as  related  to  war. 
Consequently  some  introductory  reference  to  the  distinctive 
character  of  the  governmental  contract,  as  distinguished  from 
the  commercial  contract,  is  deemed  advisable.  It  will  help 
to  define  the  viewpoint  and  to  disclose  the  features  of  this 
most  basic  structural  relation  of  modern  governments  to  the 
economic  order  of  the  nation  and  the  world. 


4  GOVERNMENT   WAR   CONTRACTS 

General  Features  of  Peace  Time  Contracting 

In  the  first  place,  this  branch  of  business  relationship  is 
unique  in  other  respects  than  mere  volume  or  gross  value. 
Even  a  casual  comparison  of  contractual  practices  and  prin- 
ciples in  this  field  with  those  in  vogue  in  commercial  circles  will 
disclose  many  inherent  peculiarities.  These  differentiating 
elements  are  of  such  a  character  as  to  mark  ofif  this  domain 
of  bargaining  as  a  realm  of  methods  and  relations  quite  unto 
itself.  So  much  is  this  the  case  that  one  can  not  go  far  into 
the  subject  under  consideration  without  convincing  himself 
that  economics  has  here  a  promise  of  almost  untouched 
research  for  the  student  of  the  future.  Government  has 
much  to  learn,  from  this  source,  about  business  relations;  and 
business  concerns  should  more  readily  avoid  what  is  unsound 
in  their  efforts  at  private  service  of  public  interests. 

The  distinctiveness  of  the  federal  contract  arises  largely 
from  the  fact  that  its  requirements  belong  to  fields  of  operation 
in  which  the  government  has  a  monopoly  of  functions.  This 
applies  primarily  to  the  War  and  Navy  Departments,  but 
by  no  means  exclusively  so.  Generally,  the  government  has 
its  own  periods  for  making  its  purchases.  It  follows  its  own 
methods  of  carrying  out  its  agreements,  to  which  the  trade 
must  conform.  It  often  buys  in  quantities  quite  unlike  what 
commercial  purchasers  require.  In  some  of  its  departments 
the  question  of  reserve  supplies  enters  fundamentally  into  the 
contractual  program.  Furthermore,  its  standards  of  both 
kind  and  quality  are  distinctive.  It  often  requires  that 
deliveries  be  made  in  sizes  and  forms  and  packing  conditions 
after  one  plan  for  the  army,  another  for  the  navy  and  a  third 
or  more  for  the  civil  administration. 

Not  only  have  the  general  provisions  regulating  contracts 
in  this  sphere  of  business  differed  for  each  department,  but 
within  the  same  department  of  government  the  different 
bureaus  have  had  an  extraordinary  liberty  of  specification, 
even  for  the  identical  commodity.  In  fact,  some  bureaus 
have  had  so  wide  a  scope  of  specialized  requirements  as  to 
.give  to  their  contracting  system  a  still  more  attenuated  variety 


WAR   CONTRACT   CONDITIONS  5 

of  bargaining  units  under  divisional  if  not  sectional  con- 
tracting officers.  Compared  with  commercial  contracting, 
these  governmental  agencies  are  prone  to  require  far  more 
elaborate  details  in  specification.  As  they  operate  in  ordinary 
times,  they  insist  on  stressing  the  standards  of  inspection 
much  more  rigidly.  So,  too,  they  enforce  more  exactly  the 
penalties  for  nonfulfilment.  As  the  final  appeal,  outside  of 
the  Court  of  Claims,  is  generally  to  the  second  party  to  the 
contract,  the  two  members  in  the  agreement  are  by  no  means 
on  an  equal  footing  in  final  adjustment  of  disputed  points. 
Owing  in  large  part  to  these  and  other  conditions,  dealings  with 
the  government  on  this  basis  have  tended  to  become  a  more 
or  less  specialized  branch  of  contractual  undertaking.  Al- 
though accompanied  with  its  inviting  lump  sum  awards,  it 
is  on  the  contrary  beset  with  some  of  the  more  forbidding 
business  hazards.  Even  though  banking  credit  is  usually 
responsive  to  advances  on  hypothecation  of  a  public  contract, 
the  hazards  involved  in  acceptable  execution  are  by  no 
means  lacking  in  speculative  quality.  It  is  not,  therefore, 
surprising  that  the  enterprise  of  filling  government  contracts 
and  orders,  whether  in  the  fields  of  construction,  of  manu- 
facturing or  of  merchandising,  should  tend  in  times  of  peace 
to  fall  into  the  hands  of  a  comparatively  limited  class  and 
coterie  of  competitive  bidders.  ^  It  is  common  knowledge  in 
business  circles  that  this  group  of  successful  contracting  con- 
cerns is  not  as  a  rule  fairly  representative  of  the  better  types 
in  the  industries  and  trades  directly  concerned.  As  a  rule, 
the  conditions  of  award  have  been  too  divergent  from  the 
prevailing  commercial  standards  to  encourage  wide  competi- 
tion. The  exactions  of  compliance  have  been  too  prone  to 
emphasize  incidentals  at  the  expense  of  essentials  to  make  it 
worth  while  for  many  of  the  most  capably  equipped  to  share 
in  the  bidding.  The  terms  of  compensation  have  been  beset 
with  too  many  routine  reports  and  too  much  "red  tape"  to 
attract  and  hold  that  type  of  business  firm  which  places 

'  Investigation  of  the  War  Department,  Hearings  before  Committee  on  Military 
Affairs,  U.  S.  Senate,  65th  Cong.,  2d  Sess.,  pp.  3,  1453,  1603.  Testimony  of  John 
P.  Wood  and  Lincoln  Cromwell. 


6  GOVERNMENT  WAR   CONTRACTS 

probity  and  fidelity  to  the  public  interests  above  the  amount 
and  rate  of  pecuniary  profits.  ^  Consequently,  government 
contracting,  to  a  far  larger  extent  than  is  for  the  public  wel- 
fare, had  gravitated  in  some  of  its  more  vital  relations  with 
business  into  the  hands  of  subaverage  grades  of  business 
standing.  Hence,  the  net  effect  of  the  policy  and  practices  in 
the  official  attitude  was  not  only  to  narrow  down  the  con- 
tracting interest  in  governmental  needs  to  a  limited,  special- 
izing class  of  concerns;  but  also  to  exclude  in  times  of  peace, 
from  that  group  on  which  the  government  had  to  depend  in 
an  emergency,  the  more  capable,  competent  and  public 
spirited  of  concerns  in  their  respective  fields  of  business. 

Basic  Factors  in  War  Time  Contracting 

Against  this  rather  narrow  background  of  peace  time 
experience,  a  new  chapter  in  contracting  history  opens.  With 
amazing  rapidity  the  shadow  of  the  European  War  was 
lengthening  in  the  direction  of  America.  Almost  before  we 
had  recovered  from  the  shock  of  the  collapse  of  international 
relations  on  the  older  basis,  we  suddenly  discovered  that  we 
had  become  the  arsenal  for  the  waging  of  a  world  war.  That 
situation  proved  to  be  a  boon  of  inestimable  value  as  a  prepa- 
ration for  national  defense  in  the  business  of  war  contract  work. 
Probably  the  most  valuable  lesson  which  came  out  of  the  two 
years  of  American  service  as  the  neutral  reservoir  of  war 
materials  and  munitions  was  that  of  the  necessity  for  the 
reconstruction  of  the  war  contract  itself. 

That  was  accomplished  by  three  definite  acts  of  Congress. 
One  of  the  reconstructive  measures  was  the  Act  of  National 
Defense  of  June  3,  1916,2  ten  months  before  the  United  States 
entered  the  war  as  a  belligerent.  A  second  enactment  bear- 
ing on  the  business  of  war  contract  relations  was  the  act 
creating  the  Council  of  National  Defense  with  its  Advisory 
Commission.  That  act  was  approved  August  26,  191 6,  so 
that   both  of  these  reconstructive   provisions   became   laws 


^  The  Engineering  Record,  May  24,  191 7,  p.  428. 
'  Public,  No.  85,  64th  Cong.  (H.  R.  12,766). 


WAR   CONTRACT   CONDITIONS  7 

before  the  outbreak  of  war  on  our  part.  A  widespread  and 
overruling  demand  on  the  part  of  public  sentiment  for  a  better 
state  of  preparedness  insisted  on  profiting  by  European  experi- 
ence. Under  the  terms  of  these  two  acts  the  United  States 
finally  entered  the  war  against  the  Central  Empires.  We 
were  not  long  in  discovering  at  appalling  costs  that  neither 
the  commandeering  of  the  war  contractor,  nor  the  voluntary 
mobilization  of  the  industrial  and  the  commercial  agencies 
and  resources  of  the  nation  could  win  the  war,  without 
reorganization  within  the  War  Department  itself  in  its  meth- 
ods and  systems  of  handling  contracts.  Congressional  inves- 
tigations disclosed  newer  methods  emerging  and  not  always 
within  the  limits  of  the  law. 

That  much  belated  remedy  was  expedited  by  the  Overman 
Act  of  May  20,  1918.  It  applied  especially  to  the  coordina- 
tion of  departmental  agencies.  Its  purposes  were  to  elimi- 
nate the  abuses  of  disjointed  competition  of  the  government 
against  itself,  to  consolidate  the  agencies  and  to  concentrate 
the  aims  of  military  and  naval  power  on  the  one  thing — the 
winning  of  the  war  against  Germany.  At  one  fell  sweep, 
this  act  enabled  the  war  authorities  to  centralize  contracting 
operations  upon  a  scale  that  promised  to  meet  with  reasonable 
promptness  the  needs  of  the  preparing  process  at  home  and 
those  of  the  Expeditionary  Forces  abroad.  Although  the 
Overman  Act  came  six  months  after  the  actual  reorganiza- 
tion of  the  contracting  machinery  of  the  department  had 
begun,  it  had  the  virtue  of  heading  the  government  in  the 
right  direction  in  what  proved  to  be  the  home  stretch  of  the 
war.  The  era  of  unreconstructed  contracting  had  given 
the  country  three  examples  of  how  not  to  do  things.  These 
appeared  in  the  bargaining  operations  of  the  Quartermaster 
General's  office,  in  the  delays  and  difficulties  of  the  Ordnance 
Department  and  in  the  misleading  prophesies  of  the  aviation 
program  of  the  Signal  Corps.  All  of  these  preceded  the  pas- 
sage of  the  Overman  Act.  As  the  last  link  in  the  series  of 
contract  reorganizing  enactments,  however,  it  had  a  basic 
relation  to  both  what  had  gone  before  and  what  followed  it. 


CHAPTER   II 

Government  Contracts  in  the  World  War 

Government  war  contracts  as  here  considered  refer  to  that 
period  included  within  the  years  of  1917,  1918  and  1919. 
During  most  of  this  period  a  state  of  hostihties  existed  between 
the  United  States  and  the  Central  Empires  of  Europe. 

The  scope  and  character  of  this  inquiry  is  not,  however, 
limited  strictly  to  the  war  contract  expenditures  on  the  part 
of  the  two  federal  departments  which  bore  the  brunt  of  mili- 
tary and  naval  enterprise.  It  also  includes  other  depart- 
mental and  special  branches  of  government.  These,  although 
under  civilian  auspices,  nevertheless  supplemented  and  effect- 
ively fortified  the  two  regular  military  establishments.  Such 
were  the  United  States  Shipping  Board,  the  United  States 
Housing  Corporation,  the  National  Council  of  Defense.  All 
of  these  and  some  others  figured  in  a  more  or  less  direct  way 
in  the  contractual  experience  of  the  government  under  condi- 
tions of  war.  No  treatment  of  the  subject  would,  therefore, 
be  adequate  which  failed  to  take  into  account  the  contribu- 
tion of  each  of  these  elements  to  the  situation.  Each  in  its 
own  way  throws  some  essential  light  on  the  process  of  con- 
tractual development.  And  it  is  only  by  consulting  this  wide 
and  richly  equipped  range  of  governmental  experience  that 
we  can  hope  to  answer  profitably  the  questions  of  what  poli- 
cies were  followed,  what  problems  arose  and  what  principles 
best  served  the  people  and  their  government  through  this  era. 

Enormous  Volume  of  Contract  Operations 

The  size  of  the  task  thus  proposed  is  by  no  means  a  modest 
one.  It  involves  a  body  of  information  which  has  as  yet 
had  almost  no  attention  on  the  part  of  research.  Its  scope 
is  rapidly  expanding  with  the  economic  powers  of  govern- 
ment. And  the  business  contract  in  general,  as  well  as  that 
between  government  and  private  enterprise,  is  one  of  the  oldest 

8 


WAR    CONTRACT    CONDITIONS  9 

as  well  as  one  of  the  most  fundamental  instruments  in  the 
evolution  of  modern  economic  life.  Under  this  form  of 
pecuniary  agreement  by  far  the  larger  proportion  of  war 
expenditures  was  disbursed  on  the  stupendous  scale  of  outlay 
which  characterized  the  prosecution  of  the  world's  war.  The 
director  of  finance  of  our  War  Department  indicates  only 
part  of  the  problem,  when,  in  his  capacity  as  one  of  the 
government's  principal  contracting  officers,  he  reports  dis- 
bursements of  $14,544,610,213.65  for  the  War  Department 
alone,  from  April  6,  1917,  to  June  i,  1919.^ 

Probably  no  exhibit  of  contractual  operations  could  be 
more  illuminating  in  this  connection  than  that  which  shows 
along  what  lines  the  aggregate  just  quoted  found  its  way 
through  the  channels  of  military  disbursements  into  the 
possession  of  the  people.  According  to  the  official  statement 
of  the  Director  of  Finance  the  thirteen  different  departments, 
corps  or  bureaus  in  the  War  Department  expended  during 
the  period  above  indicated  $12,704,822,224.49  within  the 
limits  of  the  United  States,  and  $1,839,787,989.16  through 
the  disbursing  officers  of  the  American  Expeditionary  Forces 
abroad.  This  division  of  outlay  is  amplified  in  the  table 
following: 

TOTAL  SUM  CREDITED  TO  WAR  DEPARTMENT  DISBURSING 
OFFICERS  FROM  APRIL  6,  1917,  TO  JUNE  i,  1919 

(Office  of  Director  of  Finance,  War  Department) 

Expended  by 

Department  Expended  in  American  Expe-  Total 

or  Corps  United  States  ditionary  Forces  Expenditures 

Quartermaster  Corps  $7,142,250,947.32  $1,123,454,486.28  $8,265,705,433.60 

Ordnance  Dept 3,783,345,386.02  359,138,436.14  4,142,483,822.16 

Medical  Dept 298,003,436.56  25,603,565.51  323,607,002.07 

Engmeer  Corps 435,762,558.32  204,298,597.45  640,061,155.77 

Signal  Corps  proper  120,601,757.80  8,517,848.72  129,119,606.52 
Military       Aviation 

and  Aeronautics  783,975,555  85  118,334,605.06  902,310,160.91 

Adjutant  General.  .  148,404.15          148,404.15 

Judge  Advocate  Gen.  None                        None 

ProvostMarshalGen.  30,873,427 .44         30,873,427 .44 

Contingent  expenses  2,514,951.10  440,450.00  2,955,401.10 

Additional  employes  23,411,978.08         23,411,978.08 

Chemical      Warfare 

Service 83,933,821.85         83,933,821.85 

Total  expenses.  ..    $12,704,822,224.49   $1,839,787,989.16    $14,544,610,213.65 

1  Hearings  before  the  Select  Committee  on  Expenditures  in  the  War  Depart- 
ment, House  of  Representatives,  66th  Cong.,  ist  Sess.,  Ser.  I,  part  i,  p.  40. 


10  GOVERNMENT    WAR    CONTRACTS 

It  thus  appears  that  the  distribution  of  disbursements  on 
a  geographical  basis  gives  the  domestic  field  87.3  per  cent  of 
the  total,  leaving  12.7  per  cent  as  the  proportion  for  disposal 
in  foreign  lands.  But  of  far  greater  import  is  the  distribution 
among  the  se\cral  divisions  of  the  departmental  service. 
This  analysis  brings  into  clear  relief  the  fact  that  it  is  the 
contracting  for  supplies  and  munitions  that  makes  war 
expensive.  The  Quartermaster  Corps,  the  main  supply 
agency  of  the  department,  and  the  Munitions  Department, 
both  of  whose  functions  are  now  consolidated  in  the  Purchase, 
Storage  and  Traffic  Division  under  the  General  Staff,  had 
combined  disbursement  credits  of  $12,408,189,225.76,  or 
85.3  per  cent  of  the  'department's  entire  outlay.  Of  this 
proportion  56.8  per  cent,  or  more  than  one-half  of  the  depart- 
mental expenditure,  reached  the  market  through  the  Quarter- 
master Corps;  and  24.8  per  cent  for  the  production  and  dis- 
tribution of  munitions.  Outlays  for  supplies  were  just  twice 
as  large  as  those  for  ordnance  account,  and  the  two  together 
account  for  almost  seven-eighths  of  the  expenditures  of  the 
War  Department. 

Dynamic  Import  and  Scope  of  War  Contracts 

War  contracts  have  a  dynamic  aspect  of  tremendous  eco- 
nomic import.  In  the  transition  from  the  peace  time  era  to 
the  war  contracting  regime  there  is  a  sudden  enhancement  of 
governmental  purchasing  power.  For  instance,  the  regular 
and  deficiency  appropriation  for  the  service  of  the  entire 
military  establishment  (army)  for  the  year  ending  June 
30,  191 7,  was  only  $384,496,086.  Prior  to  19 14  it  averaged 
about  $100,000,000  a  year.  For  the  year  191 8  it  rose  to 
$9,016,688,201,  and  for  1919  to  $15,416,440,084. 

To  this  grand  total  of  $14,544,610,213.65  of  army  disburse- 
ments must  be  added  $4,324,279,754  for  the  corresponding 
three  years  of  naval  appropriations;  also  the  amount  of 
$2,732,786,821  on  account  of  Shipping  Board  contracts,  and  of 
$150,000,000  for  the  Housing  Corporation  under  the  Depart- 
ment of  Labor.     The  Department  of  the  Interior  figured  to 


WAR    CONTRACT    CONDITIONS  II 

the  extent  of  an  appropriation  of  $8,000,000  for  the  settlement 
of  so-called  invalid  contracts  or  claims  for  mineral  production 
and  prospecting  on  account  of  the  war.  Other  items  might  be 
added,  but  those  mentioned,  together  with  certain  supple- 
mentary totals  expended  in  various  directions,  such  as  con- 
tracts paid  out  of  the  presidential  fund  of  $100,000,000,  would 
easily  bring  the  aggregate  up  to  $21,850,000,000  as  the  direct 
money  cost  of  the  war.  ^ 

Within  this  stupendous  sum  lies  the  core  of  the  government 
war  contracts  question.  But  not  all  of  this  was,  of  course, 
paid  out  to  contractors.  It  is  probably  safe  to  say  that  not 
over  20  per  cent  was  disbursed  on  army,  navy,  Shipping  Board 
and  other  noncontract  payrolls,  and  on  the  civilian  per- 
sonnel for  salaries  of  officers  and  employes,  etc.  That  would 
allow  80  per  cent  for  contractual  disbursements.  At  that 
ratio  we  get  a  net  total  of  $17,480,000,000  as  having  been 
expended  in  the  form  of  contracts  or  commitments,  purchase 
orders,  procurement  orders  and  the  like  during  the  war 
regime.  This  does  not  embrace  some  tens  of  millions  which 
other  departments  of  the  government  spent  directly  and 
indirectly  on  war  account.  It,  nevertheless,  gives  one  a 
fairly  approximate  idea  of  the  size  of  the  question  measured 
by  statistical  and  financial  standards. 

With  this  delimitation  of  the  field  we  pass  to  the  considera- 
tion of  some  of  the  more  general  phases  of  experience  within 
the  domain  of  gov^ernmental  bargaining.  Obviously,  to 
grasp  the  significance  of  war  time  procedure,  it  will  be  neces- 
sary to  get  in  hand  the  general  character  of  contracting  prac- 
tice in  times  of  peace.  It  will  be  equally  essential  to  bring 
out  into  clear  relief  the  main  statutory  provisions  which 
control  in  the  government's  contract  policies  under  war  time 
or  national  emergency  conditions.  Likewise,  the  question 
must  be  answered  as  to  what  administrative  principles  guided 
the  war  authorities  in  applying  the  legalized  powers  and 
policies  to  the  exigent  conditions  which  confronted   them. 

^Leonard  P.  Ayers:     The  War  with  Germany,  A  Statistical  Summary,  p.  131, 
War  Department,  Washington,  1919. 


12  GOVERNMENT    WAR   CONTRACTS 

Finalh",  we  must  sketch  at  least  in  tentative  outline  the 
colossal  reorganization  of  contracting  machinery  involved. 
The  peace  time  supply  system  of  the  army  alone  called  for  an 
average  annual  appropriation  for  the  five  prewar  years  of 
only  $100,000,000  a  year  for  the  entire  support  of  the  military 
establishment.  Imagine  the  increase  in  the  power  of  eco- 
nomic demand  to  a  world  war  scale  of  supply  command,  in 
which  the  average  annual  appropriations  for  the  War  Depart- 
ment were  $8,272,541,457,  and  the  total  appropriations  for 
the  nineteen  months  of  actual  hostilities  at  the  rate  of 
$15,674,280,000  a  year. 


CHAPTER   III 

Principles  of  Procedure  in  War  Contracting 

In  the  handling  of  government  contracts  the  principles  of 
procedure  vary  according  as  the  contracts  apply  to  times  of 
war  or  of  peace.  In  ordinary  times  the  laws  require  that 
contracting  be  done  under  competitive  bidding.  In  war 
times,  in  view  of  emergency  considerations,  the  competitive 
procedure  may  be  waived  In  favor  of  other  methods  of  pur- 
chasing better  adapted  to  the  changed  conditions.  An 
analysis  of  the  Revised  Statutes,  Acts  of  Congress,  General 
Orders  and  Supply  Circulars  of  the  War  Department,  together 
with  legal  opinions  and  official  rulings  or  decisions,  discloses 
a  mass  of  material  from  which  the  following  classification  of 
contract  principles  and  procedure  may  be  deduced: 

Statutory  Principles  of  '  Procedure 

The  policy  of  the  federal  government  toward  contracting 
concerns,  during  the  World  War,  was  formulated  In  the 
National  Defense  i\.ct  of  June  3,  1916.  In  section  120  the 
specific  procedure  is  outlined  for  the  "Purchase  or  Procure- 
ment of  Military  Supplies  in  Time  of  Actual  or  Imminent 
War. "     It  runs  as  follows: 

War  Time  Purchase  Methods  and  Priorities 

The  President,  in  time  of  war  or  when  war  is  imminent,  is  empowered,  through 
the  head  of  any  department  of  the  government,  in  addition  to  the  present  author- 
ized methods  of  purchase  or  procurement,  to  place  an  order  with  any  individual, 
firm,  association,  company,  corporation,  or  organized  manufacturing  industry  for 
such  product  or  materials  as  may  be  required,  and  which  is  of  the  nature  and  kind 
usually  produced  or  capable  of  being  produced  by  such  individual,  firm,  company, 
association,  corporation,  or  organized  manufacturing  industry. 

Compliance  with  all  such  orders  for  products  or  material  shall  be  obligatory  on 
any  individual,  firm,  association,  company,  corporation,  or  organized  manufac- 
turing industry,  or  the  responsible  head  or  heads  thereof,  and  shall  take  precedence 
over  all  other  orders  and  contracts. 

13 


14  GOVERNMENT    WAR   CONTRACTS 

This  act  went  still  further.  It  authorized  the  Secretary  of 
War  to  determine  a  reasonable  price  as  compensation,  and 
that  said  compensation  for  "products  or  material,  or  as 
rental  for  use  of  any  manufacturing  plant  while  used  by  the 
United  States,  shall  be  fair  and  just."  In  case  the  owners  or 
operators  of  any  plant  equipped  for  the  manufacture  of  arms, 
or  ammunition,  or  parts  of  ammunition,  or  any  necessary 
supplies  or  equipment  for  the  army,  should  refuse  to  manu- 
facture any  kind,  quantity  or  quality  of  arms  or  ammuni- 
tion, as  ordered  by  the  Secretary  of  War,  then — 

The  President,  through  the  head  of  any  department  of  the  government,  in 
addition  to  the  present  authorized  methods  of  purchase  or  procurement  herein 
provided  for,  is  hereby  authorized  to  take  immediate  possession  of  any  such  plant 
or  plants,  and  through  the  Ordnance  Department  of  the  United  States  Army,  to 
manufacture  there  in  time  of  war,  or  when  war  shall  be  imminent,  such  product  or 
material  as  may  be  required.  .  .  .  Any  individual,  firm,  company,  associa- 
tion, or  corporation,  or  organized  manufacturing  industry,  or  the  responsible  head 
or  heads  thereof,  failing  to  comply  with  the  provisions  of  this  section  shall  be 
deemed  guilty  of  a  felony  and  upon  conviction  shall  be  punished  by  imprisonment 
for  not  more  than  three  years  and  by  a  fine  not  exceeding  $50,000.^ 

In  order  to  safeguard  itself  against  the  possibility  of  excess- 
ive costs  in  private  plants,  this  same  act  provided  for  an 
investigation  into  the  comparative  expenses  of  manufacturing 
arms,  ammunition  and  equipment  on  governmental  account. 
A  board  of  five  citizens,  of  whom  two  were  to  be  civilians  and 
three  army  ofificers,  was  authorized  to  report  "showing  also 
what  the  government  plants  and  arsenals  are  now  doing  in 
the  way  of  manufacturing  arms,  ammunition  and  equipment, 
and  what  saving  has  accrued  to  the  government  by  reason  of 
its  having  manufactured  a  large  part  of  its  own  arms,  ammuni- 
tion and  equipment  for  the  last  four  years." 

Kernan  Report  on  Ordnance  Manufacturing  Policy 

This  report  came  to  light  in  Senate  Document  No.  664, 
dated  January  4,   191 7,  Col.  Francis  J.  Kernan,  President.. 

^  In  this  Act  $20,000,000  are  provided  (Section  124)  for  nitrate  supply,  with 
which  the  abandoned  project  of  Nitro,  W.  Va.,  has  been  concerned.  See  the 
advertisement  of  this  property  in  the  New  York  Times,  August  26,  19 19.  Accord- 
ing to  the  press  dispatches  of  December  7,  1919,  this  plant,  which  cost  the  gov- 
ernment approximately  $75,000,000,  was  sold  for  $8,551,000. 


WAR    CONTRACT    CONDITIONS  1 5 

Its  thirteen  recommendations  had  an  important  bearing  on 
the  ordnance  contracting  policy  of  the  war  authorities.  It 
found  and  recommended  that  it  was  not  desirable  for  the 
government  to  manufacture  its  arms,  ammunition  and 
equipment  exclusively;  that  such  a  policy  was  neither  practi- 
cable nor  feasible,  with  regard  to  economy  and  preparedness  in 
a  reasonable  time;  that  while  the  government  plants,  espe- 
cially the  Rock  Island  Arsenal,  should  be  increased  in  capacity 
and  a  plan  of  coordination  with  private  industries  be  worked 
out  for  full  day-and-night  capacity,  it  was  desirable  to  arrange 
with  private  industry  for  a  supply  of  whatever  reserves  of 
arms,  munitions  and  equipment  might  be  suited  to  war  time 
needs;  that  at  least  a  year's  supply  of  all  raw  material  needed 
and  not  found  within  continental  United  States  be  accumu- 
lated ;  that  a  full  supply  of  drawings  and  gauges  be  accumu- 
lated so  as  to  equip  coordinated  industries  with  these  basic 
facilities  and  that  standardized  gauges,  jigs  and  tools  be 
provided  as  soon  as  practicable;  that  skilled  labor  be  enrolled 
for  selected  factories;  that  assemblage  plants  for  field  gun 
ammunition  be  established  at  strategic  points,  with  due 
regard  to  safety  and  facility  for  distribution.  V 

The  National  Defense  Act  applied  especially  to  contract 
conditions  as  related  to  the  purchase  of  army  supplies  and 
the  production  of  munitions;  it  left  undefined  the  powers 
and  procedure  in  that  other  important  field  of  food  and  fuel 
supply.  That  was  accordingly  embodied  in  the  so-called 
Food  and  Fuel  Control  Act  of  August  lo,  191 7.  By  means 
of  these  two  basic  statutes  the  war  contracting  program 
was  buttressed  and  balanced  so  as  to  place  on  equally  firm 
foundations  both  the  command  of  economic  resources  and 
the  equipment  and  support  of  the  military  power. 

Contract  Control  in  Food  and  Fuel  Act 

In  some  respects  this  Food  and  Fuel  Control  Act  was  the 
most  important  piece  of  economic  legislation  which  the  war 
regime  called  into  being,  because  it  brought  the  nation  back 

^  National  Defense  Act  of  June  3,  1916,  Sec.  121.     Public,  No.  85,  64th  Cong. 


l6  GOVERNMENT   WAR   CONTRACTS 

to  the  assertion  of  faith  in  its  fundamental  principles  of  official 
responsibility  and  commercial  integrity  in  public  bargaining. 
Its  comprehensive  authorizations  were  among  the  most 
sweeping  of  statutory  provisions  in  the  field  of  war  contracts. 
Its  principles  were  extraordinary  both  on  account  of  what  it 
provided  for  and  also  on  account  of  what  it  put  an  end  to.  It 
established  on  a  firm  legal  basis  the  government's  price  fixing 
power  in  a  realm  of  contract  that  had  been  subject  to  some  of 
the  most  abusive  types  of  speculative  exploitation  in  these 
public  necessities.  It  likewise  helped  to  put  an  end  to  that 
situation  in  the  contracting  operations  whereby  members  of 
advisory  trade  committees  had  been  functioning  in  such 
relations  with  government  agencies  as  to  be  virtually  selling 
to  themselves  in  violation  of  the  federal  anti-trust  statutes. 
It  expressly  avoided,  however,  the  temptation  to  react  in  the 
reverse  direction,  cutting  off  the  more  helpful  lines  of  civic 
and  voluntary  cooperation.  This  was  done  by  empowering 
the  President,  as  commander-in-chief,  "to  enter  into  any 
\-oluntary  arrangements  or  agreements,  to  create  and  use  any 
agency  or  agencies,  to  accept  the  services  of  any  person  with- 
out compensation,  to  cooperate  with  any  agency  or  person,  to 
utilize  any  department  or  agency  of  the  government,  and  to 
coordinate  their  activities  so  as  to  avoid  any  preventable  loss 
or  duplication  of  effort  or  funds"  (sec.  2).^  This  particular 
provision  came  very  near  making  unnecessary  the  Overman 
Act  of  May  20,  191 8. 

To  Prevent  Collusion,  Control  Speculation  and  Fix  Prices 

The  principle  of  public  contracting,  that  the  person  who 
acts  in  behalf  of  the  government  should  have  clean  hands 
and  be  safeguarded  against  even  the  appearance  of  having  a 
pecuniary  interest  in  the  bargain,  is  set  forth  in  section  3  of 
this  act: 

That  no  person  acting  either  as  a  voluntary  or  paid  agent  or  employe  of  the 
United  States  in  any  capacity,  including  an  advisory  capacity,  shall  solicit,  induce, 
or  attempt  to  induce  any  person  or  officer  authorized  to  execute  or  to  direct  the 

1  Public,  No,  41,  65th  Cong.  (H.  R.  4961),  p.  i. 


WAR    CONTRACT    CONDITIONS  1 7 

execution  of  contracts  on  behalf  of  the  United  States  to  make  any  contract  or  give 
any  order  for  the  furnishing  to  the  United  States  of  work,  labor,  or  services,  or  of 
materials,  supplies,  or  other  property  of  any  kind  or  character,  if  such  agent  or 
employe  has  any  pecuniary  interest  in  such  contract  or  order,  or  if  he  or  any  firm 
of  which  he  is  a  member,  or  corporation,  joint-stock  company,  or  association  of 
which  he  is  an  officer  or  stockholder,  or  in  the  pecuniary  profits  of  which  he  is 
directly  or  indirectly  interested,  shall  be  a  party  thereto.  Nor  shall  any  agent  or 
employe  make  or  permit  any  committee  or  other  body  of  which  he  is  a  member  to 
make,  or  participate  in  making,  any  recommendation  concerning  such  contract 
or  order  to  any  council,  board,  or  commission  of  the  United  States,  or  any  member 
or  subordinate  thereof,  without  making  to  the  best  of  his  knowledge  and  belief  a 
full  and  complete  disclosure  in  writing  to  such  council,  board,  commission,  or 
subordinate  of  any,  and  every  pecuniary  interest  which  he  may  have  in  such  con- 
tract or  order  and  of  his  interest  in  any  firm,  corporation,  company,  or  association 
being  a  party  thereto.  Nor  shall  he  participate  in  the  awarding  of  such  contract  or 
giving  such  order.  Any  wilful  violation  of  any  of  the  provisions  of  this  section  shall 
be  punishable  by  a  fine  of  not  more  than  $10,000,  or  by  imprisonment  of  not  more 
than  five  years,  or  both:  Prov-ided,  that  the  provisions  of  this  section  shall  not 
change,  alter  or  repeal  section  forty-one  of  chapter  321,  thirty-fifth  Statutes  at 
Large. 

The  ancient  common  law  bulwarks,  by  which  the  con- 
suming public  is  enabled  to  keep  out  of  the  conspiracies  of 
commercial  distributors,  are  here  reiterated  as  the  principles 
of  public  safety  in  the  sections  which  follow.  The  provisions 
against  destroying  necessities  in  order  to  enhance  the  price  or 
restrict  the  supply  (sec.  4) ;  against  unjust,  discriminatory,  or 
unfair  or  even  wasteful  storage  without  license;  against 
hoarding  (sees.  5-6)  or  combining  to  restrict  supplies  (sec. 
9) — these  are  aimed  at  those  age  long  evils  occurring  under 
the  legal  triology  of  "engrossing,  forestalling  and  enhancing" 
so  recurrent  in  the  history  of  English  speaking  municipalities. 
Still  more  drastic  and  direct  control  over  ''foods,  feeds,  fuels 
and  other  supplies  necessary  to  the  support  of  the  army  or  the 
maintenance  of  the  navy,  or  any  other  public  use  connected 
with  the  common  defense,"  is  authorized  by  requisitioning 
existing  stocks  (sec.  10)  and  by  taking  over  "for  use  or  opera- 
tion by  the  government,  any  factory,  packing  house,  oil  pipe 
line,  mine  or  other  plant."  Just  compensation  shall  be 
ascertained  and  paid.^  But  if  said  compensation  be  not 
satisfactory,  then  75  per  cent  of  the  offered  amount  shall  be 

*  Public,  No.  41,  65th  Cong.  (H.  R.  4961),  pp.  1-5. 


1 8  GOVERNMENT    WAR   CONTRACTS 

paid,  with  the  privilege  of  suing  in  the  United  States  Circuit 
Court  for  the  determination  and  collection  of  the  difference 

(sec.  12). 

The  Theory  of  Government  War  Contracting 

Contractual  control  over  private  property  and  economic 
resources  expands  with  emergency  speed  in  the  other  sections 
•of  the  act.  An  absolute  guarantee  of  wheat  prices  which  will 
insure  producers  a  reasonable  profit,  but  not  under  $2  a 
bushel,  basis  No.  I,  northern  at  interior  markets  (sec.  14);  a 
complete  suspension  of  the  production  of  distilled  spirits  for 
beverage  purposes  at  thirty  days'  notice  (sec.  15);  fixing  the 
prices  of  coal  and  coke  "for  the  efficient  prosecution  of  the 
war"  (sec.  25);  and  the  regulation  or  even  prohibition  of 
operations  on  the  commodity  exchanges,  boards  of  trade, 
clearing  houses  and  similar  institutions  having  to  do  with  the 
prices  and  transactions  in  necessaries  where  the  evil  practices 
of  market  manipulation  or  unfair  and  misleading  quotations 
are  resorted  to  (sec.  13) — there  the  bargaining  power  of  the 
President  is  made  supreme  in  the  interest  of  public  necessity. 

The  theory  of  the  government  war  contract  is  that  the 
collective  emergency  of  the  national  struggle  for  existence 
dominates  every  phase  of  economic  life.  This  law  step  by 
step  brought  man  power,  manufacturing,  the  supply  market, 
agriculture,  mining  and  merchandising  under  its  dominion  in 
the  form  of  federal  statutes.  By  the  Urgency  Deficiency  Act 
of  June  25,  191 7,  the  President  was  empowered  to  build, 
requisition  and  acquire  ships.  Reaching  out  still  farther,  by 
the  act  of  March  21,  1918,1  the  rail  transport  systems  of 
255,000  miles  passed  under  federal  control.  And  lastly  the 
military  establishment  itself,  by  the  Overman  Act  of  May  20, 
1 91 8,  empowering  the  President  to  consolidate  executive 
bureaus,  agencies  and  offices,  had  to  capitulate  to  the  public 
demand  for  less  formality  and  more  effectiveness.^  By  this 
redistribution  of  army  supply  functions  the  policy  of  consoli- 

1  Public,  No.  107,  65th  Cong.  (S.'3752). 
^  Ibid.,  No.  152,  65th  Cong.  (S.  3771). 


WAR    CONTRACT    CONDITIONS  1 9 

dating  the  supply  service,  transportation  and  finance  com- 
pleted the  statutory  provisions  of  emergency  control  over  war 
contract  relations.^ 

Administrative  Principles  of  Procedure 

Apart  from  war  time  legislation  affecting  government  con- 
tracts, there  had  been  developed  a  large  body  of  special  acts 
and  regulations  which  defined  the  administrative  procedure 
in  entering  into  contracts.  Some  of  these  had  come  down 
from  Civil  \\"ar  time,  in  which  obligations  by  army  and 
navy  had  at  first  been  rather  loosely  assumed.  An  investiga- 
tion by  Congress  in  1861  and  1862  resulted  in  a  remedy  for 
the  method  of  indefinite  agreements  and  uncertain  liabilities 
being  then  placed  upon  the  government.  In  the  World  War 
the  same  tendency  to  waive  the  regular  methods  of  procedure 
in  concluding  contracts  came  to  prevail  very  extensively. 
Among  these  informal  awards  the  most  common  were  the 
procurement  orders  during  the  second  year  of  the  conflict. 
This  situation  came  out  in  the  days  immediately  following 
the  armistice,  when  the  Comptroller  of  the  Treasury  ruled 
against  the  validity  of  the  so-called  informal  or  verbal  con- 
tracts. The  government,  it  was  suddenly  discovered,  was  in 
no  sense  obligated,  especially  when  goods  had  not  been 
delivered,  because  the  act  of  1862  expressly  provided  that  a 
contract  could  not  be  valid  unless  it  was  signed  in  writing. 

Formal  Requirements  oj  a  Valid  Contract 

That  requirement  is  thus  quoted  from  the  Revised  Statutes, 
sec.  3744: 

Contracts  to  be  in  Writing. — It  shall  be  the  duty  of  the  Secretary^  of  War,  of  the 
Secretary  of  the  Navy,  and  of  the  Secretary  of  the  Interior,  to  cause  and  require 
every  contract  made  by  them  severally  on  behalf  of  the  government,  or  by  their 
officers  under  them  appointed  to  make  such  contracts,  to  be  reduced  to  writing, 
and  signed  by  the  contracting  parties  with  their  names  at  the  end  thereof;  a  copy 
of  which  shall  be  filed  by  the  officer  making  and  signing  the  contract  in  the  Returns 
Office  of  the  Department  of  the  Interior,  as  soon  after  the  contract  is  made  as 
possible,  and  within  thirty  days,  together  with  all  bids,  offers,  and  proposals  to- 

^  War  Expenditures  Hearings,  Ser.  I,  part  i,  p.  182. 


20  GOVERNMENT  WAR   CONTRACTS 

him  made  by  persons  to  obtain  the  same,  and  with  a  copy  of  any  advertisement  he 
may  have  published  inviting  bids,  offers,  or  proposals  for  the  same.  All  the  copies 
and  papers  in  relation  to  each  contract  shall  be  attached  together  by  a  ribbon  and 
seal,  and  marked  by  numbers  in  regular  order,  according  to  the  number  of  papers 
composing  the  whole  return. 

Contracting  Officer  Disclaims  Interest  Under  Oath 

One  of  the  most  common  difficulties  arising  under  this 
requirement  occurred  when  the  contracting  officer  who  had 
begun  negotiations  and  informally  entered  into  agreement 
with  a  manufacturer  was  called  to  duty  elsewhere,  maybe  in 
France,  leaving  the  drawing  up  of  the  terms  in  writing  and  the 
signing  to  his  successor.  Another  source  of  irregularity  was 
the  practice  of  having  a  subordinate  under  direction  of  the 
authorized  contracting  officer  do  the  signing.  Hundreds  of 
contracts  as  filed  in  the  Returns  Office  are  of  this  sort.  They 
are,  however,  none  the  less  irregular  in  procedure  when  this  is 
done  in  the  original  contract.  In  order  that  this  return  may 
be  made  in  due  form  the  statute  requires  an  oath  of  disinter- 
estedness to  be  affixed  by  the  contracting  officer  representing 
the  government.  That  part  of  the  procedure  is  contained  in 
the  Revised  Statutes,  sec.  3745 : 

Oath  to  Contract. — It  shall  be  the  further  duty  of  the  officer,  before  making  his 
return,  according  to  the  preceding  section,  to  affix  to  the  same  his  affidavit  in  the 
following  form,  sworn  to  before  some  magistrate  having  authority  to  administer 
oaths:     I  do  solemnly  swear  (or  affirm)  that  the  copy  of  conti-act  hereto  annexed 

is  an  exact  copy  of  a  contract  by  me  personally  with ;  that  I  made  the 

same  fairly  without  any  benefit  or  advantage  corruptly  to  the  said ,  or 

any  other  person;  and  that  the  papers  accompanying  include  all  those  relating  to 
the  said  contract,  as  required  by  the  statute  in  such  case  made  and  provided. 

The  penalty  for  omitting  returns  as  thus  required  "unless 
for  unavoidable  accident  or  causes  not  within  his  control," 
made  the  contracting  officer  guilty  of  misdemeanor,  and 
imposed  a  fine  of  from  $100  to  $500  and  not  over  six  months' 
imprisonment.  The  chiefs  of  the  several  supply  bureaus  are 
required  by  law  to  "insure  a  precise  and  immediate  compliance 
with  these  statutes,"  and  contracting  officers  shall  familiarize 
themselves  with  their  provisions. 


WAR   CONTRACT   CONDITIONS  21 

Advertising  for  Proposals  the  Standard  Procedure 

Although  competitive  bidding  is  waived  in  emergencies, 
it  is  a  mistake  to  assume  that  it  is  entirely  set  aside  by  war. 
Practically  all  of  the  contracts  made  by  the  reorganized 
Quartermaster  General's  Office  (after  January,  191 8),  under 
the  Purchase,  Storage  and  Traffic  Division  of  the  General 
Staff,  were  made  on  the  open  advertising  basis.  This  prin- 
ciple of  procedure  is  based  on  the  idea  that  a  fair  price  is  more 
likely  to  result  from  competitive  bidding  after  due  publicity 
in  ordinary  times.  War  conditions  might  change  the  method 
without  abandoning  the  policy.  So  it  was  held  that  even  in 
emergency  times,  with  proper  cost  accounting  and  price 
determining  facilities,  such  as  this  division  then  had  in  the 
War  Industries  Board,  better  results  could  be  gotten  by  the 
open  bidding  than  by  the  cost-plus  plan  of  award.  For  the 
further  protection  of  the  government.  Army  Commodity 
Committees  were  later  constituted.^  The  law  which  defines 
the  method  of  letting  contracts  under  this  plan  reads  as 
follows : 

All  purchases  and  contracts  for  supplies  or  services  in  any  of  the  departments  of 
the  government,  except  for  personal  service  shall  be  made  by  advertising  a  suf- 
ficient time  previously  for  proposals  respecting  the  same  when  the  public  exigencies 
do  not  require  immediate  delivery  of  the  articles  or  performance  of  the  service. 
R.  S.,  sec.  3709. 

When  immediate  delivery  or  performance  is  required  by  the  public  exigency  the 
articles  of  service  required  may  be  procured  by  open  purchase  or  by  contract  at 
the  prices  and  in  the  manner  which  such  articles  are  usually  bought  and  sold  or 
such  services  engaged  between  individuals. 

This  was  and  is  always  the  standard  procedure  in  the  pur- 
chase of  supplies,  except  when  a  duly  authorized  exigency 
makes  more  direct  methods  necessary.  In  the  absence  of  such 
authorization  by  the  head  of  the  department  or  order  of  the 
President,  the  proposal  must  be  advertised  in  the  open  market. 
The  Comptroller  of  the  Treasury  has  ruled  that  when  news- 
paper advertising  is  impracticable,  it  should  be  done  by 
circulars,   letters  or  posters,   directly  or  indirectly  advising 

1  Supply  Bulletin,  No.  22,  Purchase,  Storage  and  Traffic  Division,  August,  28, 
1918,  pp.  3-9. 


22  GOVERNMENT   WAR   CONTRACTS 

dealers.      The  navy  did  this  effectively  throughout  the  war 
period.^ 

Eliminatiou  of  the  Contract  Broker  with  Contingent  Fees 

Shortly  after  the  passage  of  the  National  Defense  Act  of 
June  3,  191 6,  the  government's  purchasing  assumed  such 
increased  proportions  as  to  attract  an  unduly  large  clientele  of 
contract  or  contingent  fee  brokers.  These  functionaries  had 
figured  largely  in  American  contracting  with  European 
belligerents  before  we  entered  the  war.  Many  became  unduly 
rich,  until  the  Allied  Governments  consolidated  their  pur- 
chases on  this  side  of  the  waters.  They  swarmed  into  the 
field  of  negotiation  between  the  departments  and  the  market, 
usually  operating  on  a  5  per  cent  basis.  This  loaded  the  cost 
to  our  government  by  just  so  much  more  in  addition  to  the 
manufacturer's  price.  At  least,  that  is  the  view  the  Attorney 
General  took  of  the  practice,  for  whose  prevalence  the  War 
Department  was  mainly  but  not  wholly  responsible.  In 
order  to  do  away  with  this  "insidious  and  reprehensible" 
method,  which  the  courts  had  universally  condemned,  the 
following  covenant  was  prescribed  for  insertion  in  all  gov- 
ernment contracts  and  orders: 

The  contractor  expressly  warrants  that  he  has  employed  no  third  person  to 
solicit  or  obtain  this  contract  in  his  behalf,  or  to  cause  or  to  procure  the  same  to  be 
obtained  upon  compensation  in  any  way  contingent,  in  whole  or  in  part,  upon  such 
procurement  and  that  he  has  not  paid,  or  promised  or  agreed  to  pay  to  any  third 
person,  in  consideration  of  such  procurement,  or  in  compensation  for  services  in 
connection  therewith,  any  brokerage,  commission,  or  percentage  upon  the  amount 
receivable  by  him  hereunder;  and  that  he  has  not,  in  estimating  the  contract  price 
demanded  by  him,  included  any  sum  by  reason  of  any  such  brokerage,  commission, 
or  percentage;  and  that  all  monies  payable  to  him  hereunder  are  free  from  obliga- 
tion to  any  other  persons  for  services  rendered,  or  supposed  to  have  been  rendered, 
in  the  procurement  of  this  contract.'^ 

Purchasing  Through  Jobbers  Discountenanced 

A  further  step  in  clearing  middlemen  from  the  field  of  con- 
tract relations  between  government  and  the  manufacturer 
was  taken  by  the  more  rigid  enforcement  of  the  general  policy 

^  Report  of  Paymaster  General  of  the  Navy,  1918,  pp.  15-16. 
2  Letter  dated  June  18,  1916,  by  the  Attorney  General  to  heads  of  ail  depart- 
ments. 


WAR   CONTRACT   CONDITIONS  23 

of  the  six  supply  bureaus  of  the  War  Department  to  buy- 
directly  from  manufacturers,  after  the  reorganization  in  191 8. 
On  this  matter  the  Director  of  Purchases,  Storage  and 
Traffic,  of  the  General  Staff,  found  it  necessary  to  issue 
Supply  Bulletin  No.  i,  dated  June  i,  191 8,  stating  again  the 
essential  features  of  the  general  policy  of  direct  purchasing. 
This  policy  was  summarized  as  follows: 

A.  That  the  War  Department  discountenances  purchases  through  jobbers  in 
general. 

B.  That  purchases  through  jobbers  are  almost  entirely  confined  to  small  emer- 
gency purchases  where  quick  deliveries  are  necessary  and  can  only  be  obtained  or 
can  best  be  obtained  from  jobbers'  stocks. 

C.  In  certain  cases  of  comparatively  small  purchases  involving  a  list  of  miscel- 
laneous articles  it  may  be  advantageous  for  the  government  to  place  one  order 
with  a  jobber  for  the  complete  list  of  articles  rather  than  place  several  orders  with 
manufacturers  of  the  various  items. 

D.  In  certain  clearly  defined  and  well  known  and  understood  cases  purchases 
are  made  through  selling  agencies  set  up  by  and  representing  one  or  more  man- 
ufacturers. These  selling  agencies  are  at  times  the  sole  authorized  agency  for 
handling  the  selling  of  the  manufacturers'  goods. 

E.  The  general  policy  of  all  bureaus  is  that  purchases  through  jobbers  are  excep- 
tional, and  exceptional  reasons,  therefore,  must  be  presented  before  such  purchases 
are  authorized. 

Other  principles  of  a  more  or  less  technical  character  gov- 
erning the  validity  of  contracts  were  brought  to  the  front  in 
connection  with  the  cancelation  of  contracts  ensuing  upon 
the  armistice.  These  are  dealt  with  in  a  later  chapter.  The 
substance  of  the  questions  involved  is,  however,  to  be  found  in 
the  Hearings  before  the  House  Committee  on  Military  Affairs, 
Sixty-fifth  Congress,  Third  Session,  on  H.  R.  13,274,  "To 
provide  relief  where  formal  contracts  have  not  been  made  in 
the  manner  required  by  law."^  These  proposals  on  the  part 
of  the  War  Department  officials,  especially  relating  to  muni- 
tions, represented  probably  25,000  outstanding  contracts, 
on  November  11,  191 8. 

Organic  Principle  of  Governmental  Supply  System 

It  required  the  greater  part  of  the  nineteen  months  of  the 
war  to  get  rid  of  the  older  supply  system  and  work  into  the 

1  Public,  No.  107,  65th  Cong.,  3d  Sess.     Approved  March  2,  1919,  usually  known 
as  the  Dent  Act. 


24  GOVERNMENT  WAR  CONTRACTS 

new.  In  the  prewar  organization  of  supply  in  the  War 
Department  the  bureau  system  of  independent  purchase 
prevailed  generally.  That  soon  proved  its  incapacity  to  do 
business  satisfactorily.  It  had  defeated  its  own  usefulness, 
by  forcing  prices  up  to  highly  speculative  levels  by  wasteful 
rivalry  among  the  contracting  ofificials,  if  for  no  other  reasons. 
It  had  been  a  survival  of  conditions  in  the  War  Department  of 
which  it  is  charitable  to  say  that  the  country  generally  was 
ignorant.  For  years  the  public  had  been  entertaining  the 
illusion  that  with  the  outlay  of  a  hundred  million  of  dollars  a 
year  it  was  maintaining  a  military  establishment  that  was 
within  reasonable  distance  of  being  ready  for  war.  The  test 
of  experience  brought  to  light  the  facts  as  opposed  to  the 
official  fiction.  The  facts  of  the  official  investigations  go  to 
show  that  the  older  supply  system  was,  like  most  other 
interests  in  the  department,  dominated  by  two  internal 
forces  of  about  equal  strength.  One  of  these  made  for  prog- 
ress; the  other  for  reaction;  together  they  automatically 
deprived  the  nation  of  its  rightful  proprietorship  in  an  ade- 
quate system  of  public  defense.  The  military  establishment 
as  such  had  many  examples  of  splendid  service  and  of 
devoted  individual  efforts  under  adverse  conditions.  Yet  it 
remains  true  of  the  establishment  as  a  whole,  with  the  excep- 
tion of  two  or  three  of  its  branches  of  service,^  that  much  of 
the  department's  business  machinery  for  handling  a  real  war 
in  the  spring  of  191 7  proved  to  be  incapable  of  adapting  itself 
to  the  needs  of  the  hour. 

In  no  particular  respect  was  this  situation  more  evident  in 
actual  practice  than  in  the  supply  functions.  Its  more  glaring 
inadequacies  had  been  exposed  in  the  mobilization  of  troops 
and  their  care  on  the  Mexican  Border.  Then  the  country 
let  it  pass  with  a  Congressional  investigation  or  two.  But, 
with  the  advent  of  the  war  with  Germany,  the  patience  of 
the  business  world  soon  reached  the  limit  of  toleration.  To 
relieve  the  army  supply  situation,  as  a  result  of  the  failure  in 

^  The  Corps  of  Engineers,  whose  business  relations  have  been  even  in  peace 
times  maintained  at  a  high  standard  of  efficiency,  likewise  found  itself  best  pre- 
pared for  war.     See  Report  of  Secretary  of  War,  1917,  pp.  34-36. 


WAR    CONTRACT    CONDITIONS  2$ 

departmental  circles  to  meet  the  conditions  adequately,  a 
large  number  and  variety  of  individuals  and  business  organiza- 
tions volunteered  to  cooperate,  each  seeking  to  assist  in  what- 
ever way  practicable.  To  cut  a  long  story  short,  the  efforts 
of  the  department  to  adjust  its  supply  machinery  to  the 
business  organization  of  the  country  brought  into  being  the 
General  Munitions  Board,  later  merged  into  the  War  Indus- 
tries Board,  as  the  means  of  mediation  between  the  two.^ 

Joi7tt  Powers  of  Purchase  and  Industrial  Control 

On  what  organic  principle  did  the  supply  system  of  the  War 
Department  ultimately  work  out  the  problem  of  contract 
relations  w^ith  business  through  the  War  Industries  Board? 
This  is  answered  in  the  statement  issued  by  the  Purchase  and 
Supply  Branch,  Supply  Bulletin  No.  22,  dated  August  28, 
1918,  defining  the  duties  of  the  army  commodity  committees 
and  army  representatives  on  commodity  sections,  as  related 
to  the  War  Industries  Board. ^  These  commodity  committees 
were  units  of  the  Purchase  and  Supply  Branch  of  the  General 
Staff;  the  commodity  sections  were  the  corresponding  units 
of  organization  on  the  War  Industries  Board.  War  Depart- 
ment representation  in  these  sections  could  become  effective 
only  to  the  extent  that  the  departmental  representatives  were 
competently  equipped  for  service  thereon.  The  principle  of 
procedure  is  thus  stated  officially  to  the  army  committees 
and  representatives  having  part  in  the  supply  of  commodities 
for  the  army  in  cooperation  with  the  War  Industries  Board: 

Conditions  of  modern  warfare  demand  more  than  the  mustering  of  armies;  they 
tax  the  productive  capacity  of  the  nation  to  its  Hmit  and  require  the  mobilization 
of  all  our  material  resources  for  the  purposes  of  war,  among  which  are  the  mainte- 
nance of  the  civilian  population  and  the  preservation  of  the  economic  fabric.  The 
provision  of  funds  and  unlimited  power  of  purchase  is  not  alone  sufficient  to  this 
end.  With  governmental  power  of  purchase  must  be  coupled  governmental  power 
to  control,  administer,  and  mobilize  industry  and  material  resource.  Every  other 
belligerent  nation  has  recognized  this  necessity  and  provided  for  it  by  creating  a 
single  agency  or  ministry  of  munitions  possessing  both  the  power  to  purchase  and 

^  See  the  Second  Annual  Report  of  the  Council  of  National  Defense  (1918), 
pp.  117-119:    "The  War  Industries  Board  and  Its  Subordinate  Agencies." 
2  Supply  Bulletin,  Xo.  22,  pp.  1-2. 


26  GOVERNMENT   WAR   CONTRACTS 

the  power  to  control  resource.  We  have  provided  a  similar  mechanism,  first,  by 
centering  the  power  to  control  resources  in  the  War  Industries  Board;  second,  by 
vesting  vast  power  of  purchase  in  the  War  Department  and  other  governmental 
agencies,  and,  finally,  by  making  these  agencies  part  and  parcel  of  the  War  Indus- 
tries Board  coupling  the  power  of  purchase  with  the  power  to  control  industry — 
all  to  a  common  end. 

War  Department  Representation  on  War  Industries  Board 

But  the  coupling  of  these  two  powers  and  the  mechanism  so  created  can  not  be 
rendered  effective  unless  all  officials  and  units  connected  with  it  have  a  clear 
understanding  of  its  purpose  and  its  organization.  On  the  part  of  some  of  our 
units  this  understanding  seems  not  complete.  Two  things  must  be  constantly 
kept  in  mind. 

First,  that  officers  representing  the  War  Department  on  the  War  Industries 
Board  or  on  any  of  its  organizational  units  are  as  much  a  part  of  the  latter  organiza- 
tion as  the  officers  of  the  War  Industries  Board  themselves  and  that  their  powers 
are  as  broad  and  their  duties  and  responsibilities  as  absolute  as  the  powers,  duties, 
and  responsibilities  of  officers  of  that  board. 

Second,  that  the  duty  of  representation  of  the  War  Department  is  not  per- 
formed by  a  mere  submission  of  our  needs  and  requirements  to  the  War  Industries 
Board.  Our  officers  must  participate  in  all  deliberations  and  plans  for  the  fulfil- 
ment of  these  requirements,  bringing  to  the  knowledge  of  the  industrial  fabric 
that  is  found  among  civilian  members  of  the  board  the  technical  knowledge  of 
materiel,  the  experience  of  war  purchase,  and  the  relative  urgency  of  the  military 
demand  that  is  found  only  in  our  own  organization.  Action  by  those  units  result- 
ing from  these  deliberations  should  be  the  joint  and  reasoned  action  of  our  own 
representatives  and  the  civilian  and  other  representatives  thereon. 


CHAPTER   IV 

Rise  and  Fall  of  Extra-Departmental  Contracting 

A  careful  survey  of  the  evolution  of  army  contracting  under 
war  conditions  discloses  three  rather  distinct  developments. 
First  came  the  older  system  of  each  bureau  doing  its  own 
purchasing  independently.  That  was  done  on  the  theory 
that  it  takes  a  military  specialist  to  buy  a  manufactured 
commodity  for  use  along  professional  and  technical  lines  of 
service.  This  plan  had  the  pecuniary  result,  when  it  came 
to  contracting  on  the  billion  dollar  scale,  of  costing  the  public 
Treasury  many  millions  of  dollars  over  and  above  what  was 
reasonably  necessary.  The  second  period  was  that  in  which 
the  Council  of  National  Defense  attempted  to  cooperate  in 
the  contracting  functions  of  the  War  Department  in  partic- 
ular, with  the  twofold  result  of  landing  the  business  organi- 
zations on  an  illegal  basis  of  cooperation  with  the  government, 
and  of  breaking  up  the  unity  of  departmental  responsibility. 
The  third  stage  was  that  in  which  a  long  advocated  plan  of 
consolidating  the  war  purchasing  agencies  was  effected  under 
a  single  control  of  the  Division  of  Purchase,  Storage  and 
Traffic,  under  the  General  Staff. 

Isolated  Bureau  System  of  Contracting  Fails 

Under  the  peace  time  system  of  isolated  bureau  contracting 
each  chief  managed  a  piece  of  official  machinery  of  varying 
degrees  of  contracting  efficiency.  In  their  narrower  and  more 
intense  fields  of  specialization  there  was  much  superior  service 
on  economical  lines.  At  intervals  the  methods  of  internal 
administration  were  overhauled,  so  as  to  bring  the  procedure 
of  a  given  bureau  somewhat  more  fully  into  line  with  prevail- 
ing business  standards.  This,  however,  strengthened  rather 
than  weakened  the  isolating  individuality  in  functions  and 
in  relations  to  the  contracting  market.     In  the  main,   the 

27 


28  GOVERNMENT    \VAR    CONTRACTS 

art  of  interbureau  cooperation  was  more  or  less  atrophied 
when  the  war  era  began  to  dawn  upon  the  department.  Even 
two  years  of  war  in  Europe  had  not  served  to  lower  the  walls 
of  partition  which  rendered  cooperative  capacity  across 
delimiting  lines  next  to  impossible  under  the  circumstances. 
Each  specialized  in  its  own  contracting  field.  The  established 
plan  was  that  of  advertising  for  bids,  waiting  a  month  or  so, 
then  opening  the  bids  in  public,  and  after  comparison  and 
inquiry  as  to  the  responsibility  of  the  bidders,  making  the 
award  to  the  lowest  acceptable  bidder.  It  was  a  safe  and 
fairly  satisfactory  peace  time  method,  but  ill-adapted  to  the 
speed  of  war  procedure,  without  some  expediting  changes  in 
plan,  such  as  the  navy  adopted.  The  ruts  of  tradition  seem 
to  have  been  too  deeply  worn  for  the  machinery  to  get  out 
and  speed  up  for  emergency  demands  by  readjustment  from 
within. 

Advisory   Supplies    Committee    Negotiates    Contracts 

It  was  this  that  made  it  comparatively  easy  for  the  Council 
of  National  Defense  to  assume,  under  the  guise  of  assisting 
negotiations,  the  virtual  role  of  war  contracting  for  the 
Quartermaster  Corps.  By  means  of  its  Advisory  Commission 
and  its  groups  of  associated  committees  the  real  work  of 
contract  making  rapidly  came  their  way.  The  supreme 
exigency  of  national  peril  was  at  hand.  Commercial  organi- 
zations were  demanding  better  coordination  of  the  several 
purchasing  agencies  of  the  government,  and  Congress  was 
advocating  a  separate  departmental  head  to  take  up  the 
production  and  supply  of  munitions.  About  the  same  time 
it  became  evident  that  the  much  advertised  aircraft  produc- 
tion was  not  functioning  satisfactorily  under  the  Signal 
Corps  proper.  In  fact,  the  advisory  personnel  had  assumed 
control  of  program  and  policy.  The  Quartermaster  General's 
Office  was  depleted  of  its  experienced  assistants,  consisting 
of  highly  capable  civilian  office  employes  whom  General 
Sharpe  had  commissioned,  only  to  have  them  transferred  to 
other  duties  than  those  in  which   they  were  preeminently 


WAR   CONTRACT    CONDITIONS  29 

needed.  Meanwhile  documents  relating  to  pending  contracts 
were  choking  the  channels  of  official  machinery  in  charge  of 
newborn  talent.  Still,  in  spite  of  this,  the  supreme  necessity 
of  coordinating  war  material  purchasing,  and  thereby  check- 
ing the  flagrant  abuse  of  competitive  bidding  among  bureau 
chiefs  and  running  up  prices  by  leaps  and  bounds,  was  sys- 
tematically opposed.  General  Goethals,  when  he  took  charge 
of  the  Quartermaster  General's  Corps,  December  26,  191 7, 
found  only  one  chief  of  bureaus  to  agree  with  him  on  this 
remedy.     On  this  subject  his  testimony  is  relevant: 

Of  course  there  was  opposition  by  all  the  bureau  chiefs.  We  were  robbing 
them,  as  they  viewed  it,  of  some  of  their  authority  and  some  of  their  perqui- 
sites and  we  met  with  considerable  difficulty  in  bringing  it  about .^ 

Belated  Advent  of  Consolidated  Supply  Service 

This  came  after  a  supervisory  makeshift  had  failed  to  work 
in  the  pooling  of  purchases.  The  really  vital  contracting 
plan  of  a  consolidation  of  purchasing  agencies  under  a  single 
head  came  into  effect  slowly.  Although  taken  up  with  the 
General  Staff  as  early  as  February,  191 8,  and  again  formu- 
lated and  put  up  to  the  General  Staff,  in  July,  1918,  it  was 
not  really  acted  upon  until  late  in  September.  Even  then 
its  actual  operation  in  full  scope  did  not  really  get  under  way 
until  the  middle  of  October — less  than  a  month  before  the 
armistice.  Fortunately,  some  of  the  correctives  of  the 
government  buying  in  the  same  market  as  rival  bureau  bidders 
were  applied  months  before  the  fully  coordinated  plan  of 
supply  service  came  into  being.  Fully  half  of  the  war  was 
fought  under  an  egregiously  uneconomic  system  of  buying, 
and  it  took  a  large  part  of  the  other  half  of  the  period  to  drive 
the  war  authorities,  both  the  Secretary  and  the  General  Staff, 
and  the  self-centered  bureaus,  to  recognize  and  abandon  the 
system  for  something  better. 

Contractual  Functions  of  War  Industries  Board 

The  necessity  for  consolidating  the  supply  service  was  made 
the  more  insistent  by  reason  of  the  fact  that  the  Council  of 

^War  Expenditures  Hearings,  Ser.  I,  part  6,  p.  523. 


30  GOVERNMENT    WAR    CONTRACTS 

National  Defense  had  meanwhile  assumed  a  role  that  was 
neither  to  the  liking  of  Congress  nor  to  that  of  the  military 
bureaus.  By  the  end  of  1917,  under  the  ineffective  efforts  of 
the  War  Department  in  handling  the  supply  situation,  the 
council  had  practically  taken  over  much  of  the  purchasing  of 
clothing  and  equipage  for  the  army  from  the  Quartermaster 
Corps.  This  was  done  through  one  of  its  advisory  commit- 
tees, especially  the  Committee  on  Supplies,  acting  in  coopera- 
tion with  the  large  trade  organizations.  It  turned  out,  how- 
ever, that  the  very  representatives  of  these  trade  and  indus- 
trial organizations  who  were  assisting  the  government  in 
making  its  supply  contracts  were  at  the  same  time  interested 
in  the  industries  and  concerns  that  were  selling  to  the  govern- 
ment. This  discovery  of  what  turned  out  to  be  a  violation 
of  the  anti-trust  laws  put  that  part  of  the  work  of  the  council 
on  an  illegal  basis.  Many  resignations  of  advisory  commit- 
teemen followed  in  order  to  avoid  even  the  appearance  of 
impropriety.  The  advisory  service  of  the  council  was  em- 
bodied in  the  price  fixing  and  cost  determining  cooperation 
of  the  War  Industries  Board  of  a  personnel  disassociated 
from  any  pecuniary  interest  in  contracting  procedure.  There- 
in was  vested  the  allocation  of  contracts  on  priority  bases  in 
supply  orders.^  By  this  time  the  Purchase  and  Storage 
Division,  with  General  Goethals  in  charge,  had  begun  to 
centralize  the  purchasing  work  of  the  Quartermaster  Corps. 
But  that  was  not  until  civic  cooperation  had  threatened  to 
shelve  much  of  the  War  Department's  out  of  date  contracting 
machinery. 

'Report  of  the  Quartermaster  General,  War  Department,   1918,  p.   10,  under 
"  Clearance"  and  "  Priorities." 


CHAPTER   V 

Types  and  Forms  of  War  Contracts 

Evolution  of  contract  forms  as  used  by  the  army  and  the 
navy  dates  mainly  from  the  beginning  of  the  Civil  War  period 
down  to  the  present  time.  In  the  Civil  W^ar  it  was  the  navy 
that  got  itself  into  trouble  from  a  rather  loose  method  of 
concluding  agreements  for  supplies.  Of  this,  at  least,  some 
enterprising  people  took  advantage  and  brought  in  claims  of 
which  there  was  at  best  doubtful  ground  for  recognition. 
That  resulted  in  the  passage  of  the  act  of  1862,  after  an 
investigation,  making  a  contract  in  writing  necessary  for  its 
validity,  and  requiring  signing  by  the  contracting  officer. 
That  law  now  stands  as  section  3744,  Revised  Statutes,  and 
is  the  cornerstone  of  our  war  time  contracting  policy.  It 
requires  other  formalities,  including  the  oath  of  disinterested- 
ness. It  implies  rather  than  requires  advertisement  for  com- 
petitive bidding  in  express  terms.  But  competitive  bidding 
was  the  peace  time  rule  which  it  w^as  sought  with  varying 
success  to  carry  over  into  war  time.  The  two  main  classes 
of  contracts  and  orders  in  use  in  the  army  in  peace  were 
competitive  awards  and  procurement  orders.  The  latter  were 
in  general  use  especially  on  the  part  of  the  Corps  of  Engineers 
in  river  and  harbor  work,  where  it  was  not  convenient  to  make 
purchases  of  supplies  during  the  short  open  season  of  outdoor 
work  by  the  more  formal  plan  of  competitive  bidding  for 
articles  of  standard  market  price.  This  was  authorized  by 
law,  and  under  that  law  the  other  bureaus  of  the  army 
purchased  freely  in  war  time,  with  the  result  that  there  was 
a  vast  number  of  informal  contracts  outstanding  when  the 
Comptroller  of  the  Treasury  ruled  that  they  were  illegal, 
whether  judged  by  war  or  peace  standards.  They  were  mainly 
orders  given  informally,  when  they  should  have  been  contracts 
drawn  and  signed  formally.  These  were  later  validated  by 
the  act  of  March  2,  1919,  known  as  the  Dent  Law. 

31 


32  GOVERNMENT   WAR   CONTRACTS 

The  following  classification  of  war  time  contracts  will 
sers'e  to  indicate  the  several  groups  of  obligations  into  which 
the  government  entered  under  different  conditions  during  the 
war  period: 

1.  Competitive  Awards,  under  sections  3744,  3745  and 
3746,  Revised  Statutes,  used  in  time  of  peace  as  the  only  legal 
form,  with  certain  exceptions.  Applied  especially  to  the  three 
departments  of  the  army,  the  navy  and  the  interior.  Used  in 
the  army  supply  purchases  after  the  reorganization  of  that 
division  under  General  Goethals,  even  during  the  war. 

2.  Cost-Plus  Contracts.  These  were  made  legal  by  the 
National  Defense  Act  of  191 6,  upon  proclamation  of  an 
emergency  condition  making  the  usual  competitive  method 
of  award  inexpedient  on  account  of  urgency  of  demand  to  be 
determined  by  the  President.  The  features  of  this  type  were 
the  payment  of  the  full  costs  by  the  government,  and  compen- 
sating the  contractor  for  his  organization  by  the  payment  of 
a  fee  either  fixed  or  in  the  form  of  a  percentage  of  the  cost. 

This  form  of  contract  was  afterwards  prohibited  by  act  of 
Congress  in  the  contracts  for  housing  facilities.^  The  Poin- 
dexter  Bill  of  May  20,  191 9,  prohibited  it  as  well  as  commis- 
sions in  any  government  contracting.  The  General  Staff, 
Purchase  and  Supply  Branch,  of  the  Purchase,  Storage  and 
Traffic  Division  of  the  army,  required  that  an  approval  sec- 
tion be  organized  to  protect  the  interest  of  the  government  in 
any  supply  bureau  where  that  form  of  cost-plus  contract  was 
being  used  to  any  considerable  extent.  (Supply  Bulletin,  No. 
18,  August  3,  191 8.)  The  act  of  Congress  applied  only  to 
the  percentage  fees — not  to  the  fixed  price  fee. 

3.  Allocation  Co?itracts.  These  were  resorted  to  when  the 
quantity  of  supplies  exceeded  the  known  capacity  of  mills, 
when  the  orders  were  apportioned  among  the  factories,  usually 
after  some  conference  among  the  representatives  of  the  trade, 
on  the  basis  of  capacity,  including  both  operating  capacity 
and  potential  capacity.    Many  of  the  contracts  for  duck  and 

1  Public,  No.  164,  65th  Cong.  (H.  R.  12,280)  amending  sec.  7  of  act  of  May  16, 
1918,  Housing  Act. 


WAR   CONTRACT   CONDITIONS  33 

woolen  cloth  were  placed  thus,  at  a  price  agreed  upon  with  a 
10  per  cent  profit. 

4.  Commandeering  or  Requisitioned  Orders.  This  was  used 
as  a  last  resort,  when  the  conditions  in  the  trade  or  industry- 
were  such  as  to  make  it  in  the  public  interest  to  waive  nego- 
tiation and  get  results  by  taking  over  industries  or  supplies 
for  public  account.  The  compensation  for  use  of  premises, 
plant,  etc.,  had  to  be  at  a  fair  and  just  price,  and  in  case  of 
dispute  to  pay  75  per  cent  down  and  settle  for  the  balance 
when  and  as  it  may  be  adjudged. 

5.  Procurement  Orders.  These  have  been  described  in 
connection  with  the  informal  contracts  under  the  head  of 
cost-plus  contracts.  The  use  of  this  type  of  order,  or  contract, 
assumes  competitive  conditions  in  the  branch  of  trade  con- 
cerned. It  pertains  usually  to  merchandise  as  to  the  prices 
for  which  there  is  an  open  market  and  of  which  no  unusual 
quantities  are  wanted  at  one  time. 

6.  Agency  Contracts.  These  were  the  kind  used  in  the  con- 
struction of  the  shipyards  and  the  ships  at  the  great  govern- 
ment plants  for  fabrication  of  tonnage  of  steel  ships.  The 
same  kind  was  used  for  the  purpose  of  accomplishing  various 
other  war  time  objects,  such  as  the 'construction  of  projects 
at  home  and  abroad.  It  provided  for  payment  by  fee  in  fixed 
amount  per  unit  of  product,  and  differed  little  from  the  cost- 
plus  contract  for  a  fixed  amount.^ 

The  competitive  contracts  were  usually  lump  sum  awards, 
though  not  always  so.  But  under  war  conditions  the  factors 
entering  into  the  making  of  prices  were  fully  disorganized. 
It  became  necessary,  therefore,  for  the  placing  of  contracts 
on  any  terms  at  all  to  recognize  the  emergency  conditions 
which  controlled  costs  and  to  adjust  the  government's 
methods  of  bargaining  to  these  new  requirements. 

Early  in  the  war  period,  owing  to  the  necessity  of  speeding 
up  all  government  work,  the  established  lines  of  procedure 

^  For  a  specimen,  see  that  of  the  American  International  Corporation  with  the 
Emergency  Fleet  Corporation  for  the  building  of  the  Hog  Island  yards  and  fifty 
ships.  This  was  signed  September  13,  1917,  and  is  reprinted  in  full  in  Investiga- 
tion of  U.  S.  Shipping  Board,  E.  F.  C,  Vol.  I,  pp.  260-271. 


34  GOVERNMENT   WAR   CONTRACTS 

in  contract  making  were  loosened  up,  yet  the  authorities 
were  unduly  slow  to  yield  to  the  policy  of  allowing  larger 
liberty  in  official  bargaining.  Instead  of  anticipating  war 
conditions,  the  recognition  of  an  emergency  was  not  author- 
ized under  the  auspices  of  the  War  Department  by  the 
Secretary's  letter  of  April  12,  191 7,  until  six  days  after  the 
declaration  of  war  with  Germany.  This  declared  that  in  view 
of  the  existence  of  an  emergency,  within  the  meaning  of  sec- 
tion 3709,  Revised  Statutes,  and  other  laws,  the  advertising 
requirement  for  bids  in  making  contracts  for  and  on  behalf  of 
the  government  might  be  omitted. 

It  was  high  time  that  some  departure  from  the  usual  for- 
malities be  provided  for,  at  the  hour  when  camp  and  canton- 
ment construction,  munitions  contracts  and  other  equally 
urgent  arrangements  were  being  effected  altogether  too 
slowly  for  the  exigencies  of  the  hour.  For  instance,  in  that 
division  of  the  Quartermaster  Corps  which  had  in  hand  the 
planning,  procurement  and  building  of  camps  and  canton- 
ments, the  entire  personnel  in  charge  at  Washington  was 
composed  of  one  colonel  and  four  men  trying  to  handle  the 
work  ostensibly  on  the  prewar  basis.  Hordes  of  contractors 
were  crowding  the  single  room  in  which  this  ill-equipped  staff 
did  its  work,  while  the  importuning  contractors  sat  on  the 
sides  of  the  officer's  desk  at  which  he  was  presiding.^ 

Army  Supply  Offices  Hindered  by  Peace  Time  Forms 

A  somewhat  similar  situation  as  to  the  pressure  for  con- 
tract action  existed  in  the  office  of  the  Chief  of  Ordnance  of 
the  army.  Almost  immediately  after  the  declaration  of  war 
this  office  began  to  experience  the  incapacity  to  meet  a  war 
situation  of  which  its  head  had  occasion  after  occasion  warned 
not  only  his  superior  in  office  but  Congress  as  well.  To  the 
credit  of  Congress,  however,  it  must  be  pointed  out  that  by 
the  National  Defense  Act  of  191 6  it  had  provided  for  an 
increase  in  personnel  of  the  Ordnance  Office.     Yet,  in  spite 

1  Testimony  of  G.  B.  Clarkson,  Director,  Council  of  National  Defense,  War 
Expenditures  Hearings,  Ser.  I,  part  3,  p.  358. 


WAR    CONTRACT    CONDITIONS  35 

of  this  emergency  provision  in  the  law,  no  increase,  except  on 
the  five  year  peace  time  basis,  in  the  much  needed  service  on 
account  of   the   supposed   imminence   of   war  was   allowed. 
The  appeal  of  Brigadier-General  Crozier,  then  in  charge  of 
ordnance,  had  been  made  long  before  that  for  authorization 
to  proceed  on  an  emergency  footing  to  make  contracts  for 
basic  requirements  for  ordnance  production,  by  "organizing 
the  increments  of  the  Ordnance  Department  without  organ- 
izing any  other  increments  provided  for  in  the  National  De- 
fense Act."     But  the  law  office  of  the  War  Department,  true 
to  the  obstructive  traditions  of  departmental  interpretation 
of  laws,  gave  negative  answer.     True  also  to  the  insatiate 
legal  appetite,  the  remedy  was  suggested  in  further  legislation. 
With  that  decision  or  ruling  the  Secretary  of  War  coincided, 
leaving    the    contracting    capacity   of    the    Ordnance    Office 
bound  hand  and  foot  to  the  limitations  of  a  prewar  basis 
with  a  personnel  of  less  than  a  hundred  officers  at  the  several 
arsenals  and  in  the  Washington  office.     A  few  dates  will  help 
to  locate  responsibility.     The  Ordnance  Office's  first  letter  on 
the  subject  was  dated  December  4,  1916,  and  the  Secretary's 
reply,    endorsing    the    Adjutant    General's    negative    ruling, 
arrived  only  on  February  9,   191 7.     Thus  the  great  oppor- 
tunity to  utilize  the  lawfully  provided  presidential  discretion 
in  declaring  an  emergency  condition  was  lost.     Meanwhile 
the  country  was  on  the  very  verge  of  war.     The  makers  of 
ordnance  and  small  arms  were  obliged  to  enter  into  provisional 
contracts  or  understandings  with  the  federal  authorities,  under 
conditions  that  radically  modified  the  speed  of  delivery  under 
contracts.     To  this  the  Ordnance  Office  as  well  as  the  Quarter- 
master General's  Office  were  driven  by  the  signal  failure  of  the 
military  establishment's  authorities  to  see  ahead  and  take 
action  in  time.     Could  any  more  convincing  proof  of  this 
paralyzing  quality  of  administrative  inaction  be  wanted  than 
the  fact  that  the  declaration  of  an  emergency  condition  exist- 
ing w^as  not  made  by  the  Secretary  of  War  until  six  days  after 
the  country  had  gone  to  war  with  Germany?     Every  contract, 
in  the  meantime,  that  was  made  on  any  but  the  prewar  basis 


36  GOVERNMENT  WAR   CONTRACTS 

of  advertising  first,  then  waiting  for  bids  and  finally  awarding 
to  the  lowest  bidder,  was  done  with  the  knowledge  that 
it  was  an  indictable  ofTense. 

Factors  Affecting  Forms  of  Contracts 

These  are  some  of  the  underlying  conditions  that  had  a 
decisive  influence  on  the  types  and  forms  of  contracts  that  had 
to  be  improvised  in  the  hour  of  national  crisis.  The  more 
immediate  factors  in  determining  the  types  of  agreements  by 
which  the  government  may  get  things  done  are  four:  (i) 
costs  of  production;  (2)  quality  of  goods  wanted;  (3)  quantity 
of  goods  wanted  and  (4)  time  within  which  delivery  is  required. 
These  are  given  in  what  may  be  called  the  peace  time  order  of 
importance.  In  war  time,  when  time  is  of  the  highest  con- 
sideration, costs  sink  to  the  bottom  of  the  list,  and  the  order 
of  relative  importance  stands  as  follows:  (i)  time  of  delivery, 
reduced  to  the  lowest  absolute  minimum;  (2)  quality,  which 
retains  its  relative  rank ;  (3)  quantity,  and  finally  (4)  costs. 

The  two  t^^pes  of  contracts  which  were  used  in  the  vast 
majority  of  cases  were  the  straight  purchase-and-sale  con- 
tract at  a  fixed  price,  and  the  cost-plus  contract.  The  addi- 
tional compensation  in  the  latter  type  might  either  be  a  defi- 
nite sum  or  a  percentage  of  the  cost  as  the  second  element  in 
pecuniary  reward.  The  former  type  is  often  called  the  lump 
sum  contract,  and  the  latter  the  cost  plus  percentage  or  fixed 
profit  contract.  In  the  one  a  fixed  price  per  unit  is  the  feature. 
In  the  other,  both  of  the  elements,  of  cost  of  production  and  of 
premium  or  percentage,  are  or  may  be  variable.  The  one 
embodies  certainty  and  definiteness  in  obligation  and  com- 
pensation, subject  to  inspection  for  quality  standards  and 
compliance  with  delivery  schedules.  The  other,  owing  to  the 
importance  of  producing  results  at  all  hazards,  makes  both 
expense  and  profit  a  contingent  outcome.  Consequently  this 
applies  to  speculative  or  experimental  undertakings,  for  in- 
stance. A  third  form,  the  agency  contract,  employs  an  already 
existing  or  especially  equipped  organization  to  produce  a 
given  product  or  perform  a  desired  experiment.     Here  the 


WAR   CONTRACT   CONDITIONS  37 

government  pays  the  bills  and  compensates  the  agent  by  a 
percentage  on  costs.  It  is  this  last  named  kind  of  agreement 
under  which  the  American  International  Shipbuilding  Cor- 
poration was  organized  to  carry  out  a  contract  for  building 
merchant  ships  for  the  United  States  Shipping  Board,  under 
the  auspices  of  the  board's  subsidiary,  the  Emergency  Fleet 
Corporation  at  Hog  Island.  The  largest  shipyard  in  the 
world  was  there  constructed  on  a  swampy  river  front  in  the 
course  of  tw^elve  months,  and  the  practicability  of  quantity 
production  of  fabricated  ships  amply  demonstrated. 

The  field  in  which  the  cost-plus  type  figured  most  widely 
in  war  contract  operations  was  that  of  camp  and  cantonment 
construction,  1  as  well  as  in  the  building  of  ofiice  buildings, 
docking  and  loading  facilities  and  warehouses  and  storage 
facilities  for  the  War  Department,  especially  for  quarter- 
master supplies  service.  By  far  the  most  of  this  work  was 
done  under  the  cooperation  of  the  Emergency  Construction 
Committee  of  the  Council  of  National  Defense. ^  To  this 
advisory  agency  belongs  the  credit  of  working  out  an  emer- 
gency form  of  contract  in  the  crisis  of  war  time  needs  as  well 
as  of  applying  the  cost-plus  contract  to  an  extremely  difficult 
situation  during  the  first  year  of  the  war.  Probably  the  best 
known  field  in  which  the  fixed  price  purchase-and-sale  type  of 
contract  figured  was  in  that  of  the  purchasing  after  reor- 
ganization (191 8)  of  the  Quartermaster's  Department  of  the 
army,  subsequently  merged  into  the  Purchase,  Storage  and 
Traffic  Division  of  the  General  Staff. 

Interdepartmental  Effort  to  Standardize  Contracts 

As  might  well  be  supposed,  the  rather  sudden  entrance  of 
the  country  upon  a  war  program  led  to  many  departures 
from  the  legalized  types  of  agreement  in  supplying  the  needs 
of  army  and  navy.  Once  the  limitations  of  the  law  were 
removed  as  to  the  statutory  and  administrative  procedure, 
and  the  full  swing  of  emergency  freedom  realized,  we  find 

1  Annual  Report  of  the  Secretary  of  War,  1918,  p.  62:    Thirty-two  Cities  of 
40,000  Population  Each. 

2  Second  Annual  Report,  Council  of  National  Defense,  pp.  188-190. 


38  GOVERNMENT    WAR    CONTRACTS 

much  confusion  arising  and  criticism  current  as  to  the  con- 
tracts under  which  war  work  was  being  done.  Many  new 
officials  were  inducted  into  contracting  offices,  who  knew  not 
the  routine  of  the  prewar  procedure  in  the  War  Department. 
In  that  situation  the  suggestion  of  an  interdepartmental  con- 
ference on  the  uniformity  of  contracts  and  cost  accounting 
methods  and  definitions  was  called.  The  conclusions  of  the 
delegates,  thirty  in  number,  representing  the  Departments  of 
Commerce,  War  and  Navy,  the  Council  of  National  Defense 
and  the  Federal  Trade  Commission,  were  as  follows: 

I.  That  in  every  instance  where  fair  terms  can  be  obtained,  contracts  should 
be  in  the  form  of  straight  purchase-and-sale  contracts  at  fixed  prices. 

The  question  of  what  constitutes  fair  terms  has  a  twofold  bearing.  In  this  com- 
mittee's view  it  served  as  the  moral  basis  from  which  the  entire  subject  of  govern- 
mental war  time  bargaining  ought  to  be  regarded.  In  its  definition  of  "fair  terms" 
the  conference  laid  down  six  criteria: 

(1)  Quality  and  quantity  of  the  article  purchased. 

(2)  Adaptability  or  inadaptability  of  the  plant  to  other  than  war  business. 

(3)  Duration  of  the  job,  proportion  of  plant  and  capital  tied  up. 

(4)  Possibility  of  fluctuations  in  material  and  labor  costs. 

(5)  Loss  to  commercial  business  by  taking  government  work. 

(6)  Comparison  with  prices  of  other  manufacturers,  competitive  bidding,  etc. 

II.  That  a  standard  form  of  straight  purchase-and-sale  contract  be  adopted  for 
use  wherever  practicable. 

Among  the  features  of  this  form  it  was  advised  that  clauses  on  the  following 
subjects  should  be  incorporated: 

(i)  Methods  of  delivery,  storage  of  product,  shipment  to  designation. 

(2)  United  States  to  pay  for  raw  material  delivered  to  the  contractor. 

(3)  To  have  the  right  itself  to  supply  material  and  component  parts. 

(4)  To  adjust  prices  on  increased  material  costs  above  estimated  costs. 

(5)  To  adjust  price  on  increase  in  labor  costs. 

(6)  Liquidated  damages. 

(7)  War  termination  clause,  providing  for  cancelation,  etc. 

This  conference  did  not  fail  to  take  account  of  certain  con- 
ditions which  made  it  difficult  to  get  contractors  to  undertake 
government  work  on  the  fixed  price  basis.  There  were  many 
elements  of  hazard  in  the  business  situation,  which  made  it 
necessary  to  follow  the  cost-plus  form  of  agreement,  in  order 
to  get  work  done  on  fair  terms  to  the  contractor  of  the  best 
intentions.  There  was,  for  example,  no  experience  on  which 
to  estimate  what  the  cost  of  making  steel  helmets  by  a  sheet 
iron  concern  might  be.     In  all  such  untried  fields  the  experi- 


WAR   CONTRACT   CONDITIONS  39 

mental  basis  of  the  cost-plus  contract  was  the  best  the  govern- 
ment could  do,  short  of  commandeering  the  plant  or  going 
into  business  on  its  own  account.  This  type  comes  into  use 
in  cases  where  the  materials  and  labor  markets  are  in  a  state  of 
fluctuation  such  as  to  make  bidding  on  the  fixed  price  plan  a 
highly  speculative  undertaking.  Moreover,  it  was  a  matter 
of  contract  experience  on  engineering  and  building  construc- 
tion projects  that  the  cost-plus  plan  had  become  a  standard 
type  of  agreement.  Why,  then,  could  it  not  be  applied  with 
confidence  to  the  enormous  construction  program  of  the 
government,  provided  the  contractors  were  selected  with  due 
regard  for  fidelity  and  efficiency  and  were  given  an  induce- 
ment to  be  economical  rather  than  extravagant?  Conse- 
quently the  recommendations — 

III.  That  in  cost-plus  contracts  a  fixed  profit  of  a  definite  sum  of  money  per 
article  be  agreed  upon  instead  of  a  percentage  of  cost. 

IV.  That  this  agreed  upon  profit  be  subject  to  adjustment,  so  that  the  con- 
tractor may  share  in  the  saving  of  costs,  or  be  charged  with  part  of  the  excess 
of  actual  cost  over  estimated  cost. 

V.  That  a  standard  form  of  cost-plus  contract  be  adapted  for  use  wherever 
practicable. 

Obviously  the  main  difficulty  in  making  this  plan  workable 
was  to  ascertain  the  costs  upon  which  contractor  and  con- 
tracting officer  could  agree.  Thanks  to  the  state  of  progress 
of  the  accounting  profession  and  the  existence  of  both  govern- 
mental and  advisory  agencies  for  price  determining  and  cost 
accounting,  this  was  a  task  of  organization  out  of  available 
talent  in  professional  circles.  But  such  a  checking  up  staff 
had  to  be  at  every  factory,  in  every  shop  and  at  every  camp 
and  cantonment  to  see  that  the  contractor,  whose  interest  it 
was  to  swell  costs,  was  not  taking  advantage  of  his  oppor- 
tunity. 

There  were  no  cost-plus  contracts  in  the  Quartermaster 
Department,  as  later  reorganized,  outside  of  the  construc- 
tion work;  or  if  any  had  been  arranged  before  December  26, 
191 7,  they  were  abrogated  later. ^  The  plan  was  opposed, 
under  the  reorganization  in  operation  during  191 8,  because 

1  War  Expenditures  Hearings,  Ser.  I,  part  6,  p.  528. 


40  GOVERNMENT   WAR   CONTRACTS 

it  produced  extravagance,  it  gave  no  incentive  to  the  con- 
tractor to  economize,  it  imposed  all  the  risks  on  the  govern- 
ment and  left  the  contractor  with  none.  Even  though  the 
Shipping  Board's  contracts  with  the  five  fabricating  yards 
were  made  on  the  cost-plus  basis,  it  was  not  considered  neces- 
sary by  the  navy  as  a  rule  to  get  contractors  on  this  plan 
either  for  yard  construction  or  for  shipbuilding,  though  often 
used  in  emergency  repair  contracts.  The  conclusion  of  the 
Interdepartmental  Conference  of  July,  191 7,  is  consequently 
sound  in  the  main,  when  it  says: 

The  interests  of  the  United  States  and  the  contractor  are  inevitably  opposed  if 
the  profit  is  based  on  a  percentage  of  cost. 

The  temptation  is  great  to  the  contractor  to  inflate  his  own  cost  as  well  as  the 
costs  of  subcontractors,  and  the  task  of  the  United  States  is  difficult  and  burden- 
some in  checking  and  determining  proper  costs.^ 

Competitive,  Cost-Plus  and  Commandeering  Contracts 

It  is  not  difficult  to  see  that  between  the  peace  time  method 
of  competitive  bidding  and  the  highly  drastic  method  of  com- 
mandeering, it  may  in  given  circumstances  become  advisable 
to  take  a  middle  course.  Commandeering  is  a  compulsory 
procedure,  and  no  compulsory  arrangement  with  the  owners  or 
operators  of  an  industry  can  possibly  bring  as  high  a  degree 
of  efficiency  in  economic  results  as  a  voluntary  agreement 
can.  Every  productive  factor — labor,  capital  and  manage- 
ment— is  to  some  extent  subnormalized  by  such  a  system  of 
manufacturing.  Commandeering  limits  if  it  does  not  largely 
negative  the  possibilities  of  cooperation  in  the  productive 
process.  When  the  history  of  this  method  of  meeting  the 
government's  war  necessities  is  written,  if  it  ever  is,  it  will  be 
seen  that  impressment  of  industry,  unless  it  be  made  uni- 
versal, always  involved  the  impairment  of  the  potentialities 
of  team  work.  Forceful  bargaining  must  inevitably  result  in 
low^ering  of  morale  in  the  productive  organization.  Nor  does 
the  competitive  selection  of  the  lowest  bidder  always  react 
favorably  on  the  spirit  of  the  factory  and   the  workshop. 

1  Uniform  Contracts  and  Cost  Accounting  Definitions  and  Methods,  p.  5. 
Government  Printing  Office,  1917. 


WAR   CONTRACT    CONDITIONS  4I 

Often  the  underbidding  is  accompanied  by  underpaid  wage 
schedules — the  wage  earning  producer  is  "sweated"  to  make 
up  for  the  lower  bid  needed  to  get  the  contract,  or  the  quality 
of  the  goods  delivered  is  "shaved,"  or  secret  understandings 
neutralize  actual  competition.  In  this  case  the  government, 
under  guise  of  open  bidding,  gets  goods  at  monopoly  costs. 
With  the  cost-plus  procedure,  on  the  contrary,  all  inducement 
to  cheat  labor,  to  use  inferior  material,  or  to  impair  the  spirit 
of  the  management  is  alienated  by  insuring  the  costs  plus  a 
reasonable  charge  for  overhead  and  use  of  the  organization. 


CHAPTER  VI 
Commandeering  as  a  Means  of  Supply  Control 

In  the  contracting  world  there  was  a  sort  of  a  stigma 
attached  to  the  fact  of  having  one's  industry  or  supply  of 
commodities  in  trade  commandeered  by  the  war  authorities. 
That  very  attitude  prevented  the  powers  from  having  to 
resort  to  this  extreme  measure.  Even  the  versatile  secre- 
tary of  the  Council  of  National  Defense  ventured  the  opinion 
in  public  testimony  "that  the  people  would  not  have  stood  for 
it,"  presumably  meaning  in  the  early  stages  of  the  war.  But, 
as  a  matter  of  fact,  the  navy  had  seized  stores  at  New  York, 
and  the  Quartermaster  General  of  the  army  had  within  a  short 
period  thereafter  commandeered  four  important  supply  com- 
modities, including  wool,  cotton,  heavy  ducking  and  canned 
goods. ^  As  a  means  of  protecting  the  public  interests,  how- 
ever, this  procedure  is,  in  some  quarters,  regarded  as  the  only 
acceptable  one  by  which  to  place  all  concerned  on  a  common 
footing  of  equity.  Certainly,  as  a  method  of  scotching  the  war 
time  serpent  of  riotous  profiteering,  as  was  the  case  in  the  tin 
trade  in  the  fall  of  191 7,  it  proved  effective.  In  that  case,  all 
questions  of  price,  grades  and  terms  of  payment  were  referred 
to  specially  appointed  district  boards  of  adjustment,  while  the 
government  lost  no  time  dickering  with  speculators  for  the 
metal  urgently  needed  for  the  manufacture  of  ammunition. 

The  Problem  of  Fair  and  Just  Compensation 

On  the  wisdom  of  contracting  by  means  of  the  commandeer- 
ing procedure  as  a  general  thing,  it  should  be  kept  in  mind 
that  none  of  the  three  other  methods  have  proved  wholly 
satisfactory.  None  will  apparently  meet  all  situations  and 
conditions,  without  some  agency  by  which  the  necessary 
negotiations,  price  fixing  and  bargaining  process  in  general 
can  be  made  to  function  with  fairness  to  both  parties  to  the 

^  War  Expenditures  Hearings,  Ser.  I,  part  6,  p.  536. 

42 


WAR   CONTRACT    CONDITIONS  43 

contract.  This  agency  the  navy  developed  in  the  Board  of 
Appraisal  and  Condemnation  at  New  York.  It  was  created 
to  act  as  a  clearing  house  to  supply  the  navy  with  information 
as  to  where  and  in  what  quantities  stores  might  be  procured, 
and  it  served  admirably  for  the  model  of  such  an  agency  of 
intelligence  and  negotiation.  This  board  of  three  officers 
had  the  duties  of  preparing  lists  of  tools,  of  making  inventories 
of  goods  of  interest  to  the  navy  as  located  in  warehouses, 
held  by  banks  or  forwarding  agents  for  export  and  of  seizing 
and  forwarding  articles  needed  by  the  navy.  In  this  capac- 
ity, up  to  June  30,  1 91 8,  it  had  inventoried  the  contents  of 
238  warehouses,  and  holdings  of  49  banks,  553  forwarding 
agents  and  223  exporters.  Considerable  quantities  of  fin- 
ished supplies  were  thus  commandeered  in  and  about  New 
York  at  a  substantial  saving  to  the  country.  These  idle 
supplies,  detained  from  the  market  in  a  scarcity  state  of 
supply,  released  just  so  much  labor  and  manufacturing  ca- 
pacity which  new  orders  of  equivalent  amounts  must  have 
entailed.^ 

Even  where  the  customary  form  of  a  contract  is  employed, 
the  mandatory  or  commandeering  order,  accompanied  by  the 
means  and  responsibility  for  determining  a  fair  and  just  price, 
has  proved  to  be  of  advantage  to  the  public  interests,  without 
prejudicing  private  interests.  For  instance,  in  the  emergency 
of  having  to  obtain  material  for  contractors,  a  letter  of  com- 
mandeering under  the  signature  of  the  single  authority  in 
which  this  power  was  vested,  cut  bales  of  red  tape  and  saved 
no  end  of  time.  Likewise,  in  a  given  shortage  of  steel  prod- 
ucts, while  congestion  at  the  seaboard  for  export  had  caused 
accumulation  of  stocks,  the  navy  was  enabled  to  commandeer 
ample  to  meet  its  needs,  and  by  Its  price  determining  power  to 
purchase  at  an  advantage  without  Impairing  the  economic 
equity  of  the  owners  or  exporters. 

The  legality  of  the  commandeering  authority  was  tested  in 
the  case  of  Moore  &  Tierney,  Inc.,  vs.  Roxford  Knitting  Co., 
in  the  U.  S.  District  Court  of  Northern  New  York.     Before 

1  Report  of  Paymaster  General  of  the  Navy,  1919,  p.  30. 


44  GO^^ERNMENT   WAR    CONTRACTS 

Justice  Ray  in  Syracuse,  June  17,  191 8,  the  decision  was 
rendered  that  the  placing  of  the  informal  order  under  urgent 
demand  for  underwear  on  the  part  of  the  navy,  irrespective 
of  the  form  of  contract  used,  was  obligatory  and  took  pre- 
cedence over  all  other  orders  and  contracts  of  the  manufac- 
turer with  private  citizens  or  firms.  And  it  was  also  decided 
that  no  damage  could  be  recovered  by  reason  of  the  claim 
that  such  contract  was  entered  into  voluntarily.  The  'con- 
tract in  this  case  was  placed  by  allocation  for  this  industry 
generally,  and  the  alleged  injury  was  claimed  to  lie  in  the 
ignominy  of  a  mandatory  order  on  the  theory  that  the  manu- 
facturer's patriotism  was  questioned  thereby. 

Form  of  the  Navy's   Mandatory  Contract  or  Order 

The  main  clauses  in  the  mandatory  order  used  by  the  Navy 
Bureau  of  Supplies  and  Accounts,  after  reciting  the  acts  of 
Congress  conferring  authorization,  stated  that — 

"an  order  is  hereby  placed  with  you  under  the  conditions  stated  in  subpara- 
graph   ,  to  furnish  and  deHver  material  needed  by  the  navy  as  listed  below. 

Compliance  with  the  order  is  obligatory  and  no  commercial  orders  shall  be  allowed 
by  you  to  interfere  with  the  delivery  herein  provided  for. 

(a)  The  price  herein  stated  has  been  determined  as  reasonable  and  just  com- 
pensation for  the  material  to  be  delivered;  payment  will  be  made  accordingly. 
If  the  amount  is  not  satisfactory  you  will  be  paid  75  per  centum  of  such  amount 
and  further  recourse  may  be  had  in  the  manner  prescribed  in  the  above  cited  acts 
(March  4,  1917,  and  June  15,  1917).     .     .     . 

(b)  As  it  is  impracticable  to  now  determine  a  reasonable  and  just  compensation 
for  the  material  to  be  delivered,  the  fixing  of  the  price  will  be  subject  to  later 
determination.     You  are  assured  of  a  reasonable  profit  under  this  order. 

(c)  The  order  must  be  accepted  and  filled  in  any  event,  and  if  placed  in  accord- 
ance with  paragraph  (a),  you  are  only  required  to  indicate  below  whether  the  price 
stated  and  fixed  is  satisfactory  or  is  not  satisfactory.  If  not  satisfactory  a  separate 
letter  of  comment  and  qualification  must  accompany  the  original  order  that  is  to 
be  signed  by  you  and  returned.  If  the  order  is  placed  under  paragraph  (b), 
original  is  to  be  signed  and  returned.     .     .     . 

By  direction  of  the  Secretary  of  the  Navy. 

(Signed)     

Paymaster  General  of  the  Navy} 

Contracts  or  orders  under  this  form,  numbering  3,342  in 
all  up  to  the  end  of  the  fiscal  year  191 8,  showed  that  1,789 

^  Report  of  Paymaster  General  of  the  Navy,  191 8,  pp.  34-36. 


WAR   CONTRACT   CONDITIONS  45 

had  been  accepted  and  returned  to  the  auditor  signed,  1,274 
awaited  final  determination  of  prices,  making  respectively  54 
per  cent  and  38  per  cent  of  the  two  classes,  while  the  remain- 
ing 8  per  cent  had  been  canceled. 

Bargaining  Value  of  Authority  to  Commandeer 

Authority  was  conferred,  by  the  National  Defense  Act  of 
June  3,  191 6,  for  the  President,  through  the  head  of  any 
department  of  the  government,  to  take  immediate  possession 
of  any  plant  refusing  to  furnish  arms,  ammunition  or  parts 
of  ammunition,  etc.,  at  a  reasonable  price  as  determined  by 
the  Secretary  of  War,  and  to  operate  such  plant  through  the 
Ordnance  Department  of  the  United  States  Army,  at  fair 
and  just  rates  of  compensation. 

This  method  of  getting  ordnance  supplies  was  one  of  four 
distinct  plans  of  letting  contracts.     They  were: 

(i)  By  taking  time  to  advertise  and  getting  competitive 
bids.  Emergency  considerations,  rather  than  inability  to 
avail  of  competition,  were  responsible  for  the  lapse  of  this 
method  during  much  of  the  war. 

(2)  The  second  policy  was  to  fix  or  agree  upon  the  price 
and  other  terms,  divide  the  amount  required  among  the 
various  manufacturers  and  have  them  deliver  according  to 
contract  entered  into  on  a  noncompetitive  basis.  This  was 
known  as  the  method  of  awarding  by  allocation.  It  was 
resorted  to  in  many  cases  in  which  the  government's  demands 
were  far  greater  than  the  available  capacity  of  the  manu- 
facturing industry  in  normal  times,  or  where  it  was  deemed 
wise  to  distribute  war  needs  equally  among  mills  engaged  on 
private  orders.  The  contractors  were  all  sure  of  getting 
orders,  in  the  former  case ;  the  only  question  w^as  the  price  as 
it  was  fixed  by  expert  knowledge  of  costs.  In  some  of  the 
ordnance  contracts  proposals  were  invited  and  allotments 
made  in  the  light  of  these  proposals.  In  this  method  price 
fixing  by  the  government  is  the  distinctive  feature. 

(3)  The  next  method  is  the  cost-plus  plan  of  award.  The 
difficulty  of  fixing  prices  at  what  the  manufacturer  regarded 


46  GOVERNMENT   WAR    CONTRACTS 

as  just,  fair  and  reasonable  led  to  this  method  on  a  large  scale 
In  ordnance  manufacturing.  Of  the  total  of  $1,750,000,000 
in  contracts  entered  Into  by  the  Ordnance  Department  up  to 
December  31,  191 7,  the  Chief  of  Ordnance  testified  that  "the 
great  majority  of  that  sum  had  been  contracted  out  under 
the  cost-plus  method  of  compensation."^  Yet  there  were 
notable  exceptions.  The  Baldwin  Locomotive  Works  of 
Philadelphia,  which  worked  wholly  on  government  contracts 
in  1 91 8  and  had  $68,400,000  of  orders  canceled  when  the 
armistice  came,  operated  almost  if  not  wholly  on  lump  sum 
contracts.  Much  the  same  was  true  of  the  J.  G.  Brill  Com- 
pany, working  on  cars,  trucks  and  field  equipment.- 

(4)  Commandeering  authorized  by  the  National  Defense 
Act  pertained  directly  to  the  possible  needs  of  the  Ordnance 
Department.  It  was  recognized  that  government  arsenals 
could  not  and  should  not  be  relied  on  to  make  the  needed 
munitions.  The  Kernan  report  on  the  subject  settled  that  as 
early  as  January,  1917,^  reporting  adversely  on  the  advisa- 
bility of  exclusive  dependence  on  government  manufacture  of 
arms,  ammunition  and  equipment.  But  in  providing  for  the 
impressment  of  private  industries  it  was  assumed  that  com- 
mandeering should  be  an  expedient  of  last  resort.  The  very 
existence  of  that  authority,  to  seize  plants  and  fix  fair  and 
reasonable  prices — thus  totally  subordinating  the  existing 
management  and  utilizing  the  working  organization  on  the 
government's  own  terms — acted  as  a  potential  factor  of 
direct  service  to  the  government  in  making  contracts.  With 
that  power  in  reserve  there  were  very  few,  indeed,  who  would 
risk  the  attitude  of  obliging  the  Ordnance  Office  to  make 
seizure  for  the  country's  exigencies.  As  a  bargaining  factor, 
the  commandeering  authority  was,  therefore,  held  In  abeyance 
for  the  most  recalcitrant  cases.  On  the  whole,  It  may  be 
said,  it  was  wisely  used,  although  in  some  cases  unnecessarily 
and  In  others  most  bungllngly. 

1  War  Expenditures  Hearings,   Ser.  I,  part  5,  p.  488. 

2  See  annual  reports  of  these  two  companies  for  the  year  1918. 
'Senate  Documenl,  No.  664,  January  4,  1917. 


WAR   CONTRACT   CONDITIONS  47 

From  another  point  of  view  commandeering  was  made 
unnecessary.  As  the  military  estabHshment  had  the  author- 
ity to  stop  private  manufacturers  from  producing  for  the 
commercial  trade  in  preference  to  the  government,  the  recalci- 
trant manufacturers  could  have  been  and  actually  were  put 
in  a  position  where  the  alternative  before  them  was  to  take  the 
government  orders  or  be  prevented  from  doing  any  business 
on  private  account.  Under  these  conditions  nothing  short  of 
blind  obstinacy  or  hope  of  gaining  by  prolonging  negotiations 
could  have  forced  the  war  or  naval  authorities  to  cut  the 
gordian  knot  and  take  over  the  plants  or  properties  without 
delay.  General  Goethals  commandeered  several  woolen 
mills  which  did  not  care  to  take  wool  to  weave  cloth  when 
the  army  was  in  urgent  need  of  present  and  prospective  sup- 
plies for  clothing  the  soldiers.  He  also  commandeered  the 
output  of  food  products,  including  canned  goods. ^  Probably 
the  term  or  act  of  commandeering  may  also  be  applied  to  the 
policy  of  the  Ordnance  Department  in  its  effort  to  meet  the 
needs  of  the  army  for  cloth  and  leather  equipment.  In  his 
report  of  191 7,  the  Chief  of  Ordnance  states  that  the  demands 
on  the  productive  industries  of  the  country  were  deemed 
certain  to  be  so  heavy  as  to  justify  the  policy  of  purchasing 
raw  materials  in  large  quantities  by  the  department  itself. 
These  were  distributed  among  the  manufacturers  contracting 
for  cotton  duck,  webbing  and  leather  goods.  Otherwise  the 
contractors  would  have  had  to  go  to  the  open  market  and  com- 
pete against  one  another,  with  the  certain  effect  of  inordinate 
price  inflation.  The  policy,  as  thus  put  into  effect,  was 
believed  to  have  resulted  in  very  important  savings  partic- 
ularly with  reference  to  leather  equipment. - 

In  naval  purchases,  commandeering  was  even  more  gener- 
ally resorted  to,  and  the  Naval  Board  of  Appraisal  and  Con- 
demnation was  especially  organized  early  in  191 8,  to  handle 
compensation  cases,  after  seizure  of  tin  supplies  in  New  York.^ 

*  War  Expenditures  Hearings,  Ser.  I,  part  6,  p.  536. 

2  Report  of  Chief  of  Ordnance  to  Secretary  of  War,  1917,  p.  19. 

^  Report  of  Paymaster  General  of  the  Navy,  1918,  pp.  30-31. 


48  GOVERNMENT   WAR   CONTRACTS 

Conditions  Which  Apparently  Justify  Commandeering 

We  have  seen  how  far  from  uniform  are  the  agreements  by 
which  the  public  authorities  and  private  interests  reach  what 
the  lawyers  call  "the  meeting  of  the  minds"  in  war  contract- 
ing. These  variations  are  partly  due  to  the  fact  that  under 
the  extraordinary  conditions  of  war  nearly  every  commodity 
is,  as  it  were,  a  law  unto  itself.  They  are  also  in  part  due  to 
the  absence  of  what  may  be  called  well  conceived  and  adapt- 
able bargaining  machinery.  The  view  that  upon  the  decla- 
ration of  war  all  commodities  and  all  services  for  the  use  of 
the  government  should  be  put  on  the  same  identical  basis  as 
that  of  the  drafted  soldier  coincides  with  the  war  contract- 
ing policy  of  declaring  everything  subject  to  mandatory 
orders  of  the  government.  Industry  was  commandeered, 
but  labor  was  not.  In  the  language  of  a  leading  British 
economist,  "Why  should  millions  be  kept  under  the  most 
severe  military  discipline  and  other  millions  be  bribed  not  to 
strike."'- 

From  the  viewpoint  of  equal  treatment  In  the  presence  of  a 
national  crisis  we  may  give  tentative  expression  to  some  of  the 
conditions  under  which  commandeering  of  resources  seems  to 
be  justifiable: 

1.  Where  the  partial  or  complete  breakdown  has  occurred 
of  the  usual  economic  conditions  under  which  values  are  de- 
terminable with  any  approach  to  fairness  and  justice,  on  the 
ordinary  basis  of  supply  and  demand  for  services  and  goods. 

2.  Where  the  tendency  of  the  trade  Is,  In  anticipation  of  a 
scarcity  condition  of  supply,  to  accumulate  unduly  large 
quantities  for  speculative  control  and  extortion  of  unreason- 
ably high  prices  from  the  public  powers  and  private  necessity. 

3.  Where  It  is  impossible  to  bring  holders  of  commodities 
and  of  individual  and  corporate  services  to  recognize  a  com- 
mon basis  of  obligation  not  to  take  advantage  of  a  national 
emergency  by  putting  personal  profit  above  collective  wel- 
fare In  the  hour  of  national  peril. 

1  J.  Shield  Nicholson,  War  Finance,  preface,  xvii-xviii.     London,  1915. 


WAR   CONTRACT   CONDITIONS  49 

4.  Where  the  unwillingness  to  accept  compensation  on  the 
basis  of  actual  costs  plus  reasonable  profit  becomes  a  serious 
handicap  to  the  rate  of  speed  and  effectiveness  of  mobiliza- 
tion of  national  resources. 

5.  Where  commandeering  may  be  required  to  forestall  or 
prevent  the  quick  rise  in  the  costs  of  living  superinduced  by 
the  race  for  excessive  profits  and  extortionate  wages  exacted 
by  the  crisis  in  public  existence. 

6.  Where  it  is  difficult  or  impossible  to  recoup  the  extra- 
ordinary need  for  public  revenues  from  taxes  on  excess 
profits  and  unearned  incomes  from  salaries  and  wages  or  other 
sources. 

No  inconsiderable  part  of  the  procedure  of  the  Food  and 
Fuel  Administration  during  the  war  was  conducted  in  more 
or  less  accord  with  these  general  principles  of  safeguarding  the 
public  interest  as  against  private  or  corporate  exploitation. 

Similarly,  the  operations  of  the  Australian  War  Precaution 
Act,  enacted  to  meet  the  coal  strike  in  that  country  during 
demobilization  of  the  army,  were  made  equally  effective  by 
the  free  exercise  of  the  commandeering  power  of  the  govern- 
ment in  a  public  exigency.^ 

Commandeering  West  Coast  Spruce  Production 

Commandeering  a  given  commodity  for  war  purposes  is 
often  if  not  always  forced  upon  the  government  by  the  posi- 
tion which  the  commercial  trade  has  taken  toward  the  public 
needs.  It  is  not  always  the  contractor's  unwillingness;  in 
fact  it  is  often  quite  the  contrary,  when  the  contractor  is  tied 
up  with  private  contracts,  as  to  which  agents  or  brokers  are 
threatening  to  sue  if  they  do  not  fill  orders  as  agreed.  That 
was  precisely  the  case  on  the  west  coast  when  the  Aircraft 
Section  of  the  Signal  Corps  came  for  a  necessary  supply  of 
airplane  spruce  and  fir.  The  Allied  governments  and  the 
airplane  corporations  had  been  there  in  advance  and  bought 
largely  through  agents  and  brokers,  to  the  extent  of  clearing 

1  Report  of  Trade  Commissioner,  A.  W.  Ferrin,  U.  S.  Commerce  Reports,  July 
21,  1918,  p.  408. 


50  GOVERNMENT   WAR   CONTRACTS 

the  timbered  log  supply.  Prices  were  as  high  as  $250  a 
thousand,  and  cost  about  $90.  Consequently  one  can  under- 
stand why  the  brokers  were  eager  to  have  their  contracts 
cleared  before  the  government  became  too  deeply  inter- 
ested in  the  situation.  Their  threat  of  receiverships,  law- 
suits and  other  forms  of  embarrassment  tied  the  hands  of  the 
lumbermen,  especially  as  the  agents  insisted  on  having  their 
orders  take  precedence  of  governmental  orders.  In  that  sit- 
uation the  commandeering  order  of  September  6,  191 7,  was 
issued,  thereby  releasing  the  contractors  of  obligation  to  fill 
the  brokers'  orders  immediately  and  clearing  the  way  for  the 
mills  to  cut  for  the  government.  This  commandeering  order 
was  drawn  in  the  Aircraft  Board,  approved  by  Howard  E. 
Coffin,  Judge  Lovett  of  the  Priority  Board  and  General  Squier 
of  the  Signal  Corps,  and  signed  by  the  Secretary  of  War, 
legally  commandeering  the  aircraft  spruce  production  of  the 
Pacific  Coast.  It  did  not  cover  the  timber  stumpage,  only 
the  lumber  cut.^ 

The  disadvantage  of  this  position,  with  brokers'  orders 
relegated  to  the  rear  and  the  government  in  control  of  trans- 
portation under  priority  rules,  was  that  the  federal  authori- 
ties were  responsible  for  losses  involved  in  canceling  or  defer- 
ring brokers'  contracts.  In  order  to  meet  this  condition  and 
save  the  public  from  penalty  costs,  it  was  negotiated  by  the 
government's  spruce  lumber  representative  that  the  private 
orders  should  be  reinstated  to  the  extent  of  80  to  85  per  cent 
of  their  volume.  This  was  done  only,  however,  on  the  condi- 
tion that  the  originals  were  canceled,  that  mills  released  the 
brokers,  and  that  the  price  of  $105,  which  the  government 
had  fixed,  be  embodied  in  the  terms.  Thus  the  orders  were 
replaced  and  releases  for  any  damage  forestalled  subse- 
quent claims. 

The  spruce  lumber  commandeering  had  another  advantage. 
It  enabled  the  aircraft  authorities  to  introduce  a  corrective 
on  the  wasteful  system  of  cutting  and  grading.     The  old  plan 

'  Investigation  of  the  War  Department.     Testimony  of  Maj.  Charles  R.  Sligh, 
Part  7,  pp.  2310-231 1. 


WAR    CONTRACT    CONDITIONS  5 1 

of  selling  on  the  basis  of  the  G  grade  had  resulted  in  cutting 
and  shipping  much  timber  not  suited  for  airplane  uses  and 
made  the  rejections  so  large  as  to  leave  only  from  15  to  20 
per  cent  of  the  stuff  received.  By  enforcing  the  more  scien- 
tific specifications,  not  only  was  economy  introduced  but 
uniformity  was  established  in  lumbering  and  timbering 
methods  in  the  logging  camps  and  at  the  cutting  mills.  It 
likewise  placed  all  producers  on  a  common  basis  of  stand- 
ardization with  the  market,  in  establishing  the  more  read- 
ily the  inspection  regulations  looking  to  conservation  and 
economy. 


CHAPTER   VII 
Contractual  Role  of  the  Council  of  National  Defense 

In  the  words  of  the  enabling  act,  the  Council  of  National 
Defense  had  the  duty  of  "the  creation  of  relations  which  will 
render  possible  in  time  of  need  the  immediate  concentration 
and  utilization  of  the  resources  of  the  nation."  It  consisted 
of  six  Cabinet  members  and  the  Advisory  Commission,  its 
alter  ego,  of  seven  civilians.  Each  of  these  seven  became  the 
chairman  of  one  of  seven  separate  committees  with  "power 
to  select  the  members  of  its  committee  from  either  govern- 
mental or  civil  life,  or  both."  The  names  of  these  several 
committees  into  which  the  Advisory  Commission  divided  its 
labors  were  medicine,  labor,  transportation,  raw  materials, 
science  and  research,  munitions  and  supplies.  Among  its 
first  steps  as  a  council  a  series  of  conferences  was  provided 
for  "with  leading  men  in  each  industry  fundamentally  neces- 
sary to  the  defense  of  the  country  in  the  event  of  war."  The 
council  likewise  created  "an  expert  body,  whose  personnel 
shall  be  chosen  by  the  commission  .  .  .  from  among 
those  having  special  knowledge  in  industrial,  miHtary  and 
naval  affairs,"  to  prepare  definite  plans  for  the  council  and 
commission  to  consider  as  a  basis  for  national  security  and 
welfare  in  the  event  of  an  international  emergency.^ 

The  duties  of  this  expert  body  carried  its  members  and 
assistants  directly  into  the  fields  which  the  various  divisions 
of  the  War  Department  traversed  in  the  performance  of  their 
established  functions.  Especially  so  was  this  the  case  with 
regard  to  the  Munitions  and  the  Quartermaster  General's 
departments,  the  two  principal  contracting  agencies  of  the 
government.  How  extensively  this  expert  board  and  the  seven 
special  committees  headed  by  the  members  of  the  Advisory 
Commission  cut  across  the  regular  work  of  the  department's 

1  National  Defense  Act,  1916,  section  defining  duties. 

52 


WAR    CONTRACT    CONDITIONS  53 

bureaus  and  divisions  is  seen  by  the  commission's  request  for 
information  as  early  as  February  i8,  191 7,  less  than  fifty  days 
before  the  declaration  of  war  on  Germany.  At  the  most 
critical  stage  in  the  preparations  for  national  defense,  these 
departmental  agencies  were  called  upon  to  supply  the  com- 
mission for  its  special  committees  "detailed  lists  of  materials 
with  specifications  and  detailed  dimensioned  blueprints, 
covering  all  equipment  needs  for  a  balanced  force  of  one 
million  men.  Estimates  were  also  to  be  furnished  covering 
supply  of  ammunition  for  the  same  force  in  the  field  during 
each  ninety  days  of  active  service."^  The  purpose  for  which 
this  information  was  desired  was  "in  order  that  approxima- 
tions may  be  made  as  to  the  amounts  of  material,  both  manu- 
factured and  raw,  for  which  it  will  be  necessary  to  draw  upon 
the  resources  of  the  country.  "^  The  already  overcrowded 
office  of  the  Quartermaster  General  of  the  army  had  thereby 
an  extra  week  of  work  thrust  upon  it,  and  more  than  that  if 
refiguring  of  its  present  data  were  required  on  the  basis  of  a 
balanced  force  as  provided  by  the  defense  act  of  June,  1916. 
The  chief  of  the  Ordnance  Department  replied  that  it  would 

take  a  long  time  to  furnish  the  information  requested.  Practically  no  copies  of 
blueprints  are  available,  so  that  about  10,000  copies  will  have  to  be  made.  Fur- 
thermore, in  many  instances  where  parts  are  manufactured  at  present  only  in 
arsenals,  no  detailed  drawings  exist.  He  also  calls  attention  to  the  fact  that  to 
furnish  a  complete  list  of  the  materials,  etc.,  as  requested,  would  require  some 
time  on  the  part  of  his  office  force  and  suggests  that  the  director  continue,  as  at 
present,  to  get  the  information  if  possible  through  Colonel  Landis,  who  is  em- 
ployed by  the  council.^ 

Contracting  Methods  of  Council's  Advisory  Committees 

Under  the  Advisory  Commission  regime  of  intended  coop- 
eration with  the  military  authorities  a  complicated  system  of 
committees  and  subcommittees  grew  up  as  if  by  magic. 
Somewhere  in  this  jungle  of  intermediating  agencies  of  an 
unofficial  or  advisory  character  the  center  of  gravity  of  con- 
tracting responsibility  disappeared  for  the  time  being.    Where- 

1  Minutes  of  Advisory  Commission,  February  28,  1917. 

2  Ibid.,  February  15,  191 7. 

3  Ibid.,  February  28,  1917.     See  pp.  561-577  in  Hearings  on  War  Expenditures, 
Ser.  I,  part  7. 


54  GOVERNMENT   WAR   CONTRACTS 

ever  it  lay,  It  was  equally  as  remote  either  from  the  parental 
council  on  the  one  hand  as  it  was  from  the  legally  liable  bureau 
chiefs  of  the  War  Department  on  the  other.  This  develop- 
ment had  its  growth  and  downfall  between  the  beginning  of 
1917  and  that  of  1918.  In  that  year's  time  the  work  of  nego- 
tiation for  many  of  the  staple  commodities  hitherto  handled 
by  the  Quartermaster's  Ofhce  of  the  army  passed  into  the 
hands  of  outside  committees  over  whose  operations  often  a 
single  civilian  was  the  presiding  genius.  Such  was  the  case 
with  the  section  on  supplies  of  the  Advisory  Commission  of 
the  Council  of  National  Defense.  Around  this  individual 
agent  practically  all  of  the  cost  accounting  and  the  price 
fixing  work  centered.  The  force  of  assistants  and  collabora- 
tors, of  which  there  were  many  talented  and  patriotic  business 
and  professional  workers,  was  responsible  to  this  individual 
agent,  the  vice  chairman  of  the  committee  on  supplies.  In 
due  time  even  the  contracting  officer,  the  highest  responsible 
contracting  official  in  the  Quartermaster  General's  organiza- 
tion, with  his  seven  commissioned  officers  and  twenty-five 
clerks,  was  moved  over  into  the  offices  of  the  advisory  com- 
mittee on  supplies.  "He  was  attached  to  us  to  sign  and 
validate  the  contracts,"  testified  the  aforesaid  vice  chairman, 
"and  generally  OK'd  everything  that  we  OK'd."^ 

In  volume  of  business  transacted  this  committee  on  supplies 
had  the  remarkable  record  of  putting  through  45,000  contracts 
in  the  nine  months  of  its  existence.  This  averaged  about  200 
contracts  a  day.  The  requisitions  came  from  the  Quarter- 
master General's  Office,  but  the  agreements  with  manufac- 
turers were  always  brought  about  in  the  purchasing  commit- 
tee's office,  where  the  vice  chairman  met  the  manufacturers 
and  negotiated  the  contracts. ^  Only  occasionally  did  this 
committee's  head  ever  advise  with  the  trade  committees 
directly  concerned;  with  the  contracting  officer  only  when 
differences  arose,  which  was  but  once  in  each  200  contracts  on 
the  average;  and  still  less  frequently  with  the  Quartermaster 

1  War  Expenditures  Hearings,  Ser.  I,  part  4,  pp.  414-415. 

*  Investigation  of  the  War  Department,  Part  2,  pp.  799-801. 


WAR   CONTRACT   CONDITIONS  55 

General  himself.  The  committee  on  supplies  had  so  com- 
pletely absorbed  the  purchasing  of  the  woolen  goods,  cotton 
goods,  knit  goods  and  shoes  and  leather  as  to  make  its  acting 
head,  the  vice  chairman,  the  de  facto  Quartermaster  General. 
In  his  written  statement,  submitted  to  the  War  Expenditures 
Select  Committee  of  the  House,  June  26,  1919,  Mr.  Charles 
Eisenman  described  the  committee's  relation  to  contracts. 
Instituted  May  17,  1917,  to  assist  the  Quartermaster's  Ofhce 
in  the  purchase  of  clothing  and  equipage,  it  occupied  itself 
with  collecting  all  needed  data  available  regarding  contracts 
existing  on  May  i  and  summarizing  the  facts  about  contracts 
made  after  that  date  which  the  committee  had  recommended. 
It  had  ingenious  systems  of  checking  up  the  progress  of  con- 
tract work,  prospective  requirements,  etc.,  so  that  after  June 
"all  contractors  were  at  once  notified  to  report,  on  forms  sup- 
plied them  for  the  purpose,  first,  of  deliveries  made  to  date  on 
each  contract  and  thereafter  weekly  on  the  weekly  shipments 
made  on  each  contract.  "'• 

Allocation   of   Contracts   by   Committee   on   Supplies 

Only  two  different  types  of  contracts  were  made  use  of  in 
the  handling  of  142  different  articles,  the  aggregate  value  of 
which  was  approximately  $800,000,000.2  For  the  three  main 
classes  of  textiles,  including  woolens,  cottons  and  knit  goods, 
the  practice  was  to  allocate  awards  among  the  mills  accord- 
ing to  capacity.  The  other  form  of  contract  was  by  competi- 
tive bidding,  and  figured  in  the  purchases  of  shoes  and  leather. 
Allocated  awards  were  really  cost-plus  contracts.  How  they 
were  negotiated  is  thus  described: 

Will  you  tell  the  committee  in  just  a  brief  narrative  way  how  you  went  on 
about  these  purchases  (asked  the  chairman  of  the  select  committee). 

Mr.  Eisenman:  Well,  knowing  the  needs  of  the  government,  we  found  out  the 
manufacturing  capacity  of  the  country,  and  at  the  same  time  we  also  determined 
the  costs.  There  is  no  such  thing  as  one  cost  in  manufacturing  cotton,  woolen, 
iron  or  steel.     We  took  the  cost  of  a  very  up-to-date  mill,  the  cost  of  a  mill  that 

^  War  Expenditures  Hearings,  Ser.  I,  part  4,  p.  412. 
*  Ibid.,  Ser.  I,  part  4,  pp.  414,  422. 


56  GOVERNMENT   WAR   CONTRACTS 

was  not  up-to-date,  and  the  general  mills,  and  we  ascertained  what  at  any  partic- 
ular time  it  would  cost  to  make  a  certain  thing.  Based  upon  that  knowledge, 
we  predicated  our  prices. 

The  Chairman:     How  did  you  do  that,  Mr.  Eisenman? 

Mr.  Eisenman:  By  calculating  in  the  ordinary  way.  When  we  were  in  doubt 
we  called  to  our  assistance  cotton  engineers  and  woolen  engineers  that  were  remote 
from  the  job,  who  had  nothing  to  do  with  it,  except  as  we  called  them  in  for  infor- 
mation. We  held  them  here  a  day  or  two,  got  the  information,  and  sent  them 
home. 

The  Chairman:  Did  you  have  accountants  employed  by  your  council  or  by 
the  War  Industries  Board  whose  business  it  was  to  estimate  the  cost  of  production? 

Mr.  Eisenman:  We  had  men — in  fact,  most  of  our  men,  the  men  that  I 
selected  to  help  me  do  the  job,  knew  manufacturing  costs  themselves,  and  they 
were  of  tremendous  help.     .     .     . 


The  Chairman:     You  did  not  make  the  contract? 

Mr.  Eisenman:   No. 

The  Chairman:     You  agreed  on  the  terms  of  it,  however? 

Mr.  Eisenman:  We  agreed  on  the  terms.  In  fact,  in  our  branch  of  the 
business  it  was  never  a  question  of  who  would  get  the  business,  but  we  allocated 
the  business  to  every  mill  in  the  United  States.  They  had  to  take  the  business. 
They  did  not  want  it,  ...  I  mean  there  was  more  business  than  there  were 
manufacturers — and  we  allocated  the  business  to  every  mill  to  its  full  capacity. 
The  mills  were  wont  to  say,  "No;  we  are  sewed  up,  and  we  cannot  take  your 
government  business,"  because  they  were  getting  20  to  30  per  cent  more  from 
civilians.  But  that  condition  was  impossible,  so  we  allocated  to  them  their  full 
production. 1 

The  allocating  principle  in  war  contracting  was  of  much 
wider  application  than  is  at  first  apparent.  As  in  the  navy,  so 
too  in  the  army  contracting  there  was  patriotic  appeal  or 
moral  suasion  used  along  with  the  consciousness  of  power  to 
place  orders  to  the  capacity  of  industries  concerned.  During 
the  first  year  of  the  war  in  the  heavy  cotton  goods  industry 
the  needs  of  the  government  were  about  four  or  more  times 
as  large  a  yardage  as  the  capacity  of  the  mills.  The  ascer- 
tained capacity  for  tentage  duck  was  twelve  or  thirteen  mil- 
lion yards,  whereas  the  army  was  in  the  market  for  87,000,000 
yards. 2  In  such  a  case  the  representatives  of  that  industry 
were  called  together,  told  of  the  situation,  and  steps  taken  to 
enlarge  producing  capacity.    For  this  and  other  cottons,  carpet 

^  War  Expenditures  Hearings,  Sen  I,  part  4,  pp.  414-416. 
'  Ibid.,  p.  404. 


WAR   CONTRACT   CONDITIONS  57 

mills  were  drawn  in  and  shown  how  to  turn  their  machinery  to 
account.  The  committee  of  suppHes'  engineers  on  duty  at  the 
cotton  mills  were  sent  to  the  woolen  and  the  silk  mills  to 
meet  the  crying  needs  of  ducks.  Wherever  the  demands  ex- 
ceeded the  capacity  and  the  civilian  trade  yielded  profits  of  a 
scarcity  market,  the  allocating  plan  of  contracting  had  to  be 
resorted  to.  It  was  the  same  in  the  woolen  as  in  the  cotton 
industry,  as  the  vice  chairman  to  the  committee  on  supplies 
has  pointed  out  in  his  testimony: 

Mr,  Eisenman:  The  woolen  manufacturers  were  very  willing  to  help  when 
they  saw  the  light,  but  not  all  of  them  were  willing  to  help  in  the  same  degree. 
I  mean  they  wanted  to  exclude  one-fourth  of  their  product  for  civilian  purposes, 
because  they  got  a  lot  more  money  that  way.  Then  some  of  the  manufacturers 
that  were  willing  to  come  in  and  make  government  goods  wanted  more  than  we 
would  pay,  so  we  ascertained  what  was  a  fair  price,  and  for  five  months  we  main- 
tained that  price  against  all  odds And  when  they  were  not  willing, 

about  the  first  of  the  year  (1918)  they  spilled  the  beans  and  complained  to  the 
Senators  that  we  were  not  treating  them  fairly.     .     .     . 

The  Chairman:  Was  that  the  time  the  complaint  was  made  that  you  gentle- 
men were  buying  of  yourselves? 

Mr.  Eisenman:  Well,  you  know  that  broke  the  fine  morale.  All  the  manu- 
facturers we  dealt  with  had  absorbed  the  philosophy  that  the  thing  to  do  was  to 
serve  with  us  and  to  serve  in  the  highest  and  best  possible  degree.  There  were 
some  selfish  men,  and  unfortunately  the  Senate  committee  absorbed  their  philos- 
ophy before  they  did  ours.^ 

The  method  of  ascertaining  costs  against  which  there  was 
complaint  allowed  a  profit  of  approximately  lo  per  cent  after 
including  the  elements  of  labor,  materials,  overhead  and 
returns  on  the  investment.  This  was  regarded  as  reasonable 
profit  when  working  for  the  government  on  one  thing.  The 
strength  of  this  system  of  cost  determining  and  price  arrang- 
ing lay  primarily  in  the  mastery  of  the  factors  of  costs,  in  its 
treatment  of  the  manufacturers  on  a  substantially  common 
basis,  and  in  the  prevention  of  undue  profits  by  the  exploita- 
tion of  the  government  in  a  national  emergency.  The  navy 
did  the  same  thing  in  its  official  capacity  as  an  established 
feature  of  contract  policy. 

^  War  Expenditures  Hearings,  Ser.  I,  part  4,  p".  416. 


58  government  war  contracts 

Advisory   Control   of   Contracts   in   War    Industries 

Board 

The  weakness  of  the  policy  or  system  followed  by  the 
advisor}^  committee  on  supplies,  and  the  fundamental  cause  of 
its  overthrow  came,  however,  from  a  quite  different  direction. 
There  were  both  constitutional  and  statutory  objections  to  the 
setting  up  of  an  extra-departmental  contracting  mechanism. 
It  was  all  the  worse  when,  as  in  this  case  of  the  committee  on 
supplies,  an  advisory  agency  practically  preempted  the  Quar- 
termaster General's  functions  of  purchases  by  lodging  control 
in  the  hands  of  a  civilian  who  had  not  been  in  any  regular 
business  for  thirteen  years  before  coming  to  Washington. 
There  were  also  administrative  objections,  in  at  least  two 
basic  directions.  Finally — and  this  was  the  rock  on  which 
the  advisory  system  went  aground — there  arose  legal  diffi- 
culties which  found  voice  in  Congressional  criticism  and  in 
the  complaints  of  trade  organizations.  Of  these  repeated 
criticisms  in  both  Senate  and  House,  bearing  on  the  contract- 
ing relations  of  the  council  and  its  committees  to  the  War 
and  Navy  Departments  the  Council  of  National  Defense  felt 
obliged  to  take  account  at  its  session  of  July  i8,  191 9.  It 
realized  that  there  was  a  more  than  ordinary  degree  of  mal- 
adjustment both  with  relation  to  Congress  and  to  the  war 
making  departments  in  its  effort  to  serve  as  a  medium  of 
intercommunication  and  interaction  between  the  government 
and  the  business  organizations  of  the  country.  Somehow  it 
had  put  itself,  the  advisory  commission  and  their  advisory 
committees,  in  a  false  position  as  to  its  policy  and  methods 
of  contracting.  To  rectify  this  and  to  clear  away  this  evident 
misunderstanding  as  to  the  character  and  value  of  the  services 
being  rendered  in  the  conduct  of  the  war,  the  following  plan 
was  decided  upon: 

In  the  conduct  of  the  affairs  of  the  council  the  Secretary  of  War  and  the  Secre- 
tary of  the  Navy,  who  already  have  the  legal  power  to  fix  prices,  to  make  purchases, 
and  to  authorize  contracts  for  the  army  and  for  the  navy,  should  act  as  ex-officto 
members  of  the  General  Aiunitiops  Board,  and  with  the  chairman  of  the  Munitions 
Board  should  act  as  the  War  Purchasing  Board  of  the  Council  of  National  Defense, 
which  board  should  finally  approve  all  contracts  and  authorize  the  purchase  of 


WAR    CONTRACT    CONDITIONS  59 

all  materials  by  directing  the  present  authorized  agents  of  the  government  now 
serving  in  the  two  departments,  the  army  and  the  navy.^ 

'  In  order  to  divest  itself  of  all  contact  with  the  negotiating, 
the  price  determining  and  the  cost  accounting  relations  of  the 
contract  making  bureaus  of  the  departments,  the  council 
differentiated  these  cooperative  functions  into  a  distinct 
agency  in  the  form  of  the  War  Industries  Board,  to  succeed 
the  War  Munitions  Board.  This  board  for  the  rest  of  the 
war  acted  with  the  departmental  agencies,  in  the  capacity  of 
clearing  contracts  proposed,  on  matters  of  allocation  of 
contracts,  checking  prices  quoted  and  otherwise  guiding  the 
different  contracting  bureaus,  especially  the  Ordnance  and  the 
Quartermaster  General's  operations  in  supply  contracting. 
On  May  28,  191 8,  the  President  made  of  this  board  a  distinct 
entity,  one  main  purpose  of  which  was  to  so  reorganize  the 
membership  of  this  board  as  to  prevent  any  person  having 
any  interest  in  contracts  from  serving  in  a  contracting  capac- 
ity on  this  or  any  other  advisory  body.  The  earlier  advisory 
committees  that  had  been  called  into  being  by  the  Council  of 
National  Defense  were  largely  dissolved.  In  order,  however, 
to  avoid  all  appearance  of  crookedness,  while  still  retaining 
the  valuable  advisory  services  of  these  committees  represent- 
ing the  country's  industries,  they  were  reconstituted  into  war 
service  committees  under  the  Chamber  of  Commerce  of  the 
United  States.  They  rendered  unquestioned  service  "in 
correlating  procurement  of  supplies  in  the  several  industries," 
although  the  main  work  of  industrial  mobilization  had  by  this 
time  been  done.^ 

The    Council's    Position    in    Principle    and    Practice 

In  its  relations  to  war  contracting  the  council  had  in  princi- 
ple only  an  advisory  capacity.  The  law  on  the  subject  was 
explicit.  But  in  practice  it  tended  to  assume  administrative 
functions  belonging  entirely  to  the  contracting  officers  of  the 
army   in   particular.     It  went  even   farther;    it   practically 

1  Resolution  of  Commissioner  Coffin,  Council  Minutes,  July  i8,  1917. 

2  War  Expenditures  Hearings,  Ser.  I,  part  3:   Testimony  of  G.  B.  Clarkson, 

P-34I- 


60  GOVERNMENT    WAR    CONTRACTS 

wrote  the  terms  of  the  contracts  for  suppHes  and  raw  materials 
for  the  Quartermaster  General's  and  the  Ordnance  Offtces. 
For  instance,  it  virtually  determined  the  terms  for  the  first 
big  copper  contracts  for  the  Ordnance  Office  in  the  bargaining 
with  a  score  or  so  of  the  big  copper  producing  and  selling 
concerns  which  controlled  about  75  per  cent  of  the  country's 
output.  The  War  Department's  representative  "sat  in" 
at  these  meetings,  and  was  on  hand  at  the  finish  to  sign  the 
agreement. 

On  this  question  two  quotations  may  suffice.  The  memo- 
randum of  the  Chief  of  Ordnance,  War  Department,  for  which 
this  copper  was  bought  by  contract  dated  April  21,  191 7, 
notes  as  item  2: 

It  is  understood  that  the  price  was  fixed  at  a  meeting  between  the  copper 
producers  and  the  advisory  commission  of  the  Council  of  National  Defense.^ 

The  second  quotation  from  testimony  of  the  director  of  the 
council  runs  thus: 

The  Council  of  National  Defense  did  not  of  itself  let  any  contracts  for  supplies. 
It  made  all  the  arrangements  for  supplies,  but  headed  the  actual  letting  of  con- 
tracts up  to  the  War  Department.  As  time  went  on  it  amounted  in  effect  to 
contractual  relations  with  the  manufacturers,  but  the  contracts  technically  were 
made  by  the  War  Department.^ 

The  purchasing  policy  developed  by  the  Council  of  National 
Defense  and  the  plan  put  into  operation,  when  it  came  to  be 
examined,  was  found  to  be  entirely  foreign  to  the  business 
relations  of  the  government  before  the  war.  Nor  was  it 
deemed  necessary  under  the  circumstances,  had  there  been 
sufficient  coordination  among  the  bureaus  in  the  hands  of 
some  official  of  good  organizing  ability.  The  very  absence  of 
such  coordination  in  the  prewar  bureau  system  gave  occasion 
and  opportunity  for  the  council  to  assume  the  role  of  a  coordi- 
nating agency  under  executive  authority.  Beginning  as  an 
advisory  body,  its  relation  to  the  contracting  work  demon- 
strated the  necessity  for  greater  unity  of  contract  control,  and 
it  ended  as  the  chief  purchasing  bureaus  of  the  government 

*  War  Expenditures  Hearings,  Ser.  I,  part  3:     Testimony  of  G.  B.  Clarkson, 
p.  69. 
2  Ibid.,  Ser.  I,  part  3,  p.  337. 


WAR   CONTRACT   CONDITIONS  6 1 

became  coordinated.  Not  until  March,  1918,  when  the  War 
Industries  Board  was  cut  loose  from  the  council,  and  assigned 
to  advisory  service  to  the  War  and  Navy  Departments,  did 
things  contractual  begin  to  right  themselves  on  the  normal 
administrative  basis. 

Any  fair  criticism  of  the  position  of  the  council  in  its 
relation  to  the  work  of  inaugurating  and  shaping  up  the 
business  arrangements  of  the  government  must  include  the 
following : 

1.  It  had  the  effect  of  dividing  the  responsibilities  of  the 
War  Department  under  executive  approval. 

2.  Instead  of  curing  departmental  competition,  it  caused 
more  of  it  in  some  directions  by  increasing  the  difficulties  of 
the  bureaus  in  fields  of  purchase  which  the  council's  commit- 
tees and  subcommittees  had  already  invaded. 

3.  It  absorbed  constitutional  functions  belonging  to  regular 
departments  of  government,  both  executive  and  legislative. 

4.  It  lodged  powers  of  contract  negotiating  and  price 
fixing  authority  in  the  advisory  commodity  or  trade  com- 
mittees, leaving  only  a  nominal  responsibility  in  the  legally 
liable  contracting  officer  of  the  government.^ 

5.  It  was  responsible  for  the  arrangements  by  which  repre- 
sentatives of  interested  industries  acted  on  committees  which 
both  sold  to  and  bought  from  the  government  in  the  same  act. 

^  War  Expenditures  Hearings,  Ser.  I,  part  6,  pp.  518,  540. 


PART   II— WAR   CONTRACT  OPERATIONS 

CHAPTER  I 

Army  Supply  Orders  and  Contracts — Quartermaster,  Engi- 
neer and  Medical 

The  Quartermaster  Corps  in  the  modern  army  is  the  great 
provider  for  the  military  organization.  In  the  American 
army  in  the  European  War  approximately  three-fifths 
(56.8  per  cent)  of  the  entire  expenditures  of  the  War  Depart- 
ment were  made  by  the  Quartermaster  General  under  the 
bureau  form  of  organization,  or  by  its  reorganized  successor, 
the  Division  of  Purchase,  Storage  and  Traffic,  under  the 
General  Staff.  The  exact  figures  convey  an  idea  of  the  rela- 
tive importance  of  this  arm  of  the  service  in  the  business 
relations  of  the  army.  In  round  numbers  the  Quartermaster 
General's  Office  spent  $8,265,000,000  out  of  the  total  for  the 
entire  War  Department  of  $14,544,000,000  between  April  6, 
1917,  and  June  i,  1919.  Of  the  former  total  $7,142,000,000 
were  spent  in  the  United  States  and  $1,123,000,000  by  the 
American  Expeditionary  Forces  abroad.  These  supply  ex- 
penses do  not,  of  course,  include  the  Ordnance  Office's  expend- 
itures, w^hich  in  total  amount  were  half  the  size  of  those 
of  the  Quartermaster  General's  Office. 

Here  as  in  other  divisions  of  service  the  practice  of  giving 
procurement  orders  as  well  as  awarding  more  formal  contracts 
prevailed  in  the  system  of  purchasing  supplies.^  This  was  a 
rather  general  method  of  procurement  in  the  Engineer  Corps, 
and  the  system  seems  to  have  been  extended.  Although  the 
law  required  bids  and  advertising,  in  order  to  insure  competi- 
tion, as  it  was  assumed,  the  purpose  of  the  law  was  regarded 

^  Contracting  and  purchasing  practice  in  the  Quartermaster  General's  Office 
is  described  under  the  prewar  regime  in  Circular  No.  7,  "Purchase  of  Supplies 
and  Engagements  of  Services,"  March  23,  1915.  In  war  time,  in  Notice  No.  28, 
on  "Regulation  of  Purchasing"  July  18,  1918. 

63 


64  GOVERNMENT   WAR   CONTRACTS 

as  respected  so  far  as  these  orders  pertained  to  articles  and 
commodities  of  a  standard  kind  and  quality  as  to  which  there 
was  a  market  price  competitively  determined. 

The  Quartermaster  General's  Office  was  one  of  the  few 
branches  of  the  military  establishment  which  had  undergone 
an  up-to-date  reorganization  shortly  before  the  European 
War  began.  But  as  that  was  to  meet  the  needs  of  the  small 
regular  army,  including  the  upbuilding  of  adequate  reserves  of 
supply,  it  soon  found  itself  out  of  date  for  several  reasons. 
First  came  the  mobilization  on  the  Mexican  border.  That 
soon  exhausted  the  reserves  and  disclosed  some  points  of 
decided  weakness  both  in  the  structure  and  in  the  functioning 
of  the  corps.  Consequently,  when  we  entered  the  World 
War,  it  was  common  knowledge  from  the  very  start,  as  the 
Secretary  of  War  reported,  that — 

The  supply  needs  of  the  department  (corps)  were  vastly  greater  than  the 
capacity  of  the  industrial  organization  and  facilities  normally  devoted  to  their 
production,  and  the  problem  presented  was  to  divert  workshops  and  factories  from 
their  peace  time  output  into  the  intensive  production  of  clothing  and  equipment 
for  the  army.  Due  consideration  had  to  be  given  to  the  maintenance  of  the  indus- 
trial balance  of  the  country.  Industries  already  devoted  to  the  manufacture  of 
supplies  for  the  nations  associated  with  us  in  the  war  had  to  be  conserved  to  that 
useful  purpose.  .  .  .  In  19 17  the  normal  appropriation  for  the  Quartermaster 
Department  (corps)  was  $186,305,000.  The  emergency  appropriation  for  this 
department  for  the  year  1918  was  $3,000,000,000;  a  sum  greater  than  the  normal 
annual  appropriation  for  the  entire  expenses  of  the  federal  government  on  all 
accounts.! 

Reorganization   of   the   Army   Supply   System 

It  was  these  conditions  and  requirements  that  from  the 
very  beginning  so  overloaded  the  Quartermaster  Corps' 
machinery  for  handling  its  own  orders  and  contracts  as  to 
produce  confusion  and  give  the  impression  of  administrative 
incompetence.  The  difficulty  was  not,  however,  so  much  a 
matter  of  personnel  as  of  position.  The  gist  of  the  entire 
failure  to  function  satisfactorily  was  more  in  the  traditional 
isolation  of  the  supply  service  from  contact  with  the  commer- 
cial and  industrial  organization  than  in  anything  else. 

'  Report  of  the  Secretary  of  War,  1917,  p.  38. 


WAR  CONTRACT  OPERATIONS  65 

Between  the  rise  of  these  conditions  in  the  supply  service, 
under  its  small  scale  bureau  organization,  and  the  reconstruct- 
ing process  which  began  early  in  the  war,  looking  toward 
comprehensive  reorganization,  there  was  an  interval  of 
remarkable  administrative  interest  in  the  business  relations 
of  the  Quartermaster's  Office.  When  its  inability  to  do  the 
vastly  increased  volume  of  work  became  evident,  many  of 
the  country's  most  capable  business  men  volunteered  to  come 
to  the  rescue  and  serve  in  any  capacity  without  consideration 
in  order  to  relieve  the  swamped  supply  office.  Most  of  this 
pressure  came  by  way  of  the  Council  of  National  Defense, 
through  whose  advisory  committees  civilian  contact  with  the 
various  branches  of  the  military  service  was  to  be  found. 
Almost  parallel  with  the  process  of  reorganization  which  was 
going  on  within  the  Quartermaster  General's  Office  there 
arose  the  contracting  and  negotiating  activities  of  the  Com- 
mittee on  Supplies  in  the  Council  of  National  Defense — a 
committee  that  in  the  purchasing  emergency  for  a  period  of 
several  months  took  the  lead  in  the  arranging  and  issuing  of 
orders  and  contracts  running  into  hundreds  of  millions  of 
dollars.  Its  methods  have  been  described,  and  the  remedy  is 
given  in  the  account  of  the  reorganized  purchasing  mechanism 
as  it  developed  under  the  pressure  of  actual  war  and  war 
time  criticism. 

One  of  the  most  instructive  instances  of  reorganization  in 
the  course  of  action  is  to  be  found  in  this  reconstruction  of  the 
army  supply  system,  which  took  effect  late  in  191 7.  Supply 
Bulletin  No.  29,  dated  November  7,  1917,  as  quoted  below, 
outlined  the  considerations  by  which  the  General  Staff  was 
moved  to  take  this  radical  step.  The  war  authorities  frankly 
recognized  the  reform  as  the  result  of  public  criticism,  con- 
gressional investigation  and  confessed  inability  on  the  part 
of  the  existing  bureau  system  of  contracting  to  function  satis- 
factorily : 

1.  The  prior  existing  system  was  organically  unsound  in  such  a  degree  as  to 
render  it  doubtful,  or  at  least  uncertain,  whether  it  could  carry  the  increasing  load 
for  even  as  much  as  one  year. 

2.  The  reorganization  was  such  that  it  could  be  effected  along  the  lines  of  the 


66  GOVERNMENT   WAR   CONTRACTS 

natural  tendency  toward  improvement  and  was  not  an  upheaval  by  fiat.  It 
in\olved  a  plan  of  gradual  improvement  toward  a  specific  goal,  so  arranged  as  to 
result  in  no  interference  with  the  "going  concern." 

3.  The  principal  mistakes,  confusions,  and  delays  under  the  prior  system  were 
directly  traceable  to  centers  of  organic  unsoundness. 

4.  The  advisability  of  the  reorganization  depended  on  the  proposed  plan  being 
such  as  to  cure  the  faults  of  the  prior  existing  system  and  to  be  capable  of  being 
put  into  effect  without  delaying  the  supply  program. 

A  memorandum  of  similar  tenor  had  been  issued  under 
date  of  July  18,  1917,  approved  by  the  General  Staff,  which 
had  long  since  seen  the  necessity  of  bringing  the  bureau  units 
of  the  military  organization  into  some  form  of  coordinated 
relation  and  common  control.  Supply  circulars  had  promul- 
gated at  intervals  much  of  this  plan,  beginning  as  early  as 
June.  These  were  issued  from  the  Purchase  and  Supply 
Branch  of  the  Purchase,  Storage  and  Traffic  Division  of  the 
General  Staff. ^  Into  this  nexus  of  procurement  control  step 
by  step  were  gathered  during  these  eventful  months  of  supply 
reorganization  the  thousand  and  one  lines  of  contract  rela- 
tions. As  the  various  agencies  of  supply  came  to  find  their 
focus  in  the  new  organization,  waste  and  cost  abuses  began  to 
diminish.  And  under  modern  conditions  of  warfare  the  sup- 
plying of  the  army,  to  quote  the  official  statement,  "makes 
demands  that  completely  absorb  the  economic  and  industrial 
facilities  of  the  nation."  One  of  the  greatest  gains  was  the 
elimination  of  overlapping  and  lost  motion. 

In  the  plan  which  was  gradually  put  into  effect,  between 
the  midsummer  of  1917  and  the  spring  of  1918,  the  supply 
function  was  subdivided  into  the  three  well  recognized  activi- 
ties of  purchase,  storage  and  traffic.  In  the  theory  of  the  Gen- 
eral Staff,  as  contrasted  with  that  of  the  highly  differentiated 
bureau  system,  each  of  these  constituted  a  separate  and  clearly 
specialized  task  on  its  own  account.  Fitness  to  purchase,  it 
was  assumed,  resided  in  men  and  organizations  experienced  in 
commodity  transactions,  rather  than  in  a  large  variety  of 
technical  divisions,  each  operating  in  isolated  indifference  or 

^  War  Department,  General  Staff — Subject:  "Recent  Reorganization  of  Army 
Supply  System,"  pp.  1-12.  Also  Supply  Circulars,  Nos.  80,  loi,  103,  109,  no, 
and  P.  and  S.  Notices  19  and  21. 


WAR  CONTRACT  OPERATIONS  67 

ignorance  of  what  any  or  all  of  the  others  were  doing.  It 
was  therefore  held  that  purchasing  is  normally  divided  into 
commodity  sections,  and  not  by  functions  of  service,  as  under 
the  peace  time  system.  This  is  the  plan  by  which  the  Navy 
Department,  through  its  Bureau  of  Supplies  and  Accounts, 
achieved  the  deserved  reputation  of  reducing  the  business  of 
purchasing  to  a  science  of  effective  contracting.  The  navy, 
under  its  purchasing  arrangements,  had  forty  commodity 
sections,  each  of  which  is  under  a  section  chief,  who  is  at  the 
head  of  specialists  in  that  particular  market.  This  principle 
the  Purchase  and  Storage  Division  followed ;  it  regarded  pur- 
chasing, storing  and  transporting  for  the  army  as  highly 
specialized  tasks  of  such  sameness  as  to  be  well  coordinated 
under  one  head. 

Bureau  System's  Defects  in  Practice  and  Theory 

One  of  the  main  reasons  why  the  peace  time  organization 
of  the  War  Department's  contracting  broke  down  under  the 
weight  of  war  time  responsibilities  was  to  be  found  in  the  fact 
that  it  w^as  overloaded  with  misassigned  duties.  In  the  case 
of  its  purchasing,  the  two  most  important  ofhces  of  the  Ord- 
nance Corps  and  the  Quartermaster  General  had  a  mass  of 
accrued  routine  work.  This  could  have  been  performed  by  a 
common  purchasing  and  contracting  agency;  but  so  long  as 
that  remained  it  prevented  the  particular  office  from  keeping 
pace  M^ith  its  strictly  technical  work  by  concentration  of  effort 
thereon.  Naturally  enough,  General  Crozier,  Chief  of  Ord- 
nance, in  urging  an  increase  of  commissioned  personnel, 
December  4,  191 6,  in  view  of  what  was  properly  regarded  as 
emergency  conditions,  found  his  department  "instead  of  get- 
ting abreast  of  its  responsibilities,  falling  constantly  farther 
and  farther  behind  in  the  production  of  new  designs  which 
progress  had  shown  to  represent  practical  advance  in  ordnance 
construction."! 

This  confusing  of  military  function  with  commercial  sup- 

^  Ordnance  Office  Letter  to  the  Adjutant  General,  War  Department,  December 
4,  1916.  Quoted  in  Hearings  on  War  Expenditures,  1919,  Ser.  I,  part  5,  pp.  453- 
454- 

6 


68  GOVERNMENT   WAR   CONTRACTS 

ply  service,  of  operative  duties  with  supply  contracting  func- 
tions, is  possibly  the  main  reason  for  the  failure  of  the  several 
bureaus  to  rise  to  the  emergency  of  the  war  time  demands. 
In  the  acid  test  of  practice  the  theoretically  unsound  situation 
in  organization  was  brought  to  light,  too  late  though  to  escape 
the  consequences  of  a  thoroughly  Brahminic  policy  in  the  con- 
tracting system.  Plurality  of  supply  agencies,  besides  pro- 
moting competition  unduly,  prevented  lower  prices  for  bulk 
orders,  made  supervision  difficult,  multiplied  types,  quanti- 
ties, designs,  forestalled  interchangeability  in  supply,  pre- 
\ented  the  balanced  accumulation  of  reserves  in  keeping  with 
the  army  program  by  the  different  bureaus,  required  five 
different  sets  of  property  accountability  by  line  officers  and 
duplicated  over  and  over  again  the  processes  of  distribution, 
assemblage  and  storing. 

Competition  among  departmental  supply  units  was  a  far 
more  potent  influence  in  boosting  prices  in  the  earlier  stages 
of  hostilities  than  is  commonly  supposed.  Major  General 
George  W.  Goethals  testified  clearly  on  this  matter  before  the 
Select  Committee  of  the  House  on  War  Expenditures,  July  i, 
1 91 9.  He  had  assumed  charge  of  the  reorganization  program 
as  Acting  Quartermaster  General  of  the  army,  December  26, 
191 7,  serving  until  March  4,  191 9.  He  said,  as  recorded  in 
these  Hearings:^ 

When  I  came  here  as  Acting  Quartermaster  General  and  began  looking  into  the 
clothing  situation  I  found  the  condition  of  the  wool  market  very  serious.  I  found 
that  the  Quartermaster  General  was  buying  clothing;  that  the  Signal  Corps  was 
buying  clothing;  that  the  Medical  Department  was  buying  some  clothing; 
that  the  Ordnance  Department  was  furnishing  blankets,  so  that  they  were 
all  competing  with  each  other.  We  were  furnishing  harness  and  saddles  for 
mules,  and  also  furnishing  wagons;  the  Ordnance  Department  was  furnishing 
saddles  and  harness  for  horses.  We  of  the  Quartermaster  Department  had 
launched  the  Liberty  trucks,  but  the  Ordnance  Department  was  buying  its  own 
trucks,  and  the  Engineers  were  buying  their  own  trucks  and  automobiles,  and 
the  Signal  Corps  was  buying  trucks  and  automobiles,  and  paying  no  attention  to 
the  Liberty  truck,  which  we  had  developed;  all  were  entering  into  competition 
with  one  another. 

The  Chairman:     What  was  the  efifect  of  that  competition? 


1  War  Expenditures  Hearings,  Ser.  I,  part  6,  pp.  521-522. 


WAR  CONTRACT  OPERATIONS  69 

General  Goethals:  Well,  it  increased  prices  to  some  extent,  until  we  got 
the  War  Industries  Board  to  fix  prices,  and  until,  as  Quartermaster  General,  I 
secured  the  cooperation  of  the  War  Industries  Board  and  commandeered  all  the 
wool.  Even  then  there  was  competition  between  the  army  and  the  navy  on  the 
wool  situation.  I  became  thoroughly  convinced  of  the  advisability  of  a  ministry 
of  munitions,  but  that  had  been  decided  against  me  by  the  higher  authorities,  so 
I  concluded  the  best  thing  we  could  do  in  the  War  Department  was  to  bring 
about  such  coordination  and  consolidation  of  purchases  as  would  do  away  with 
this  competition. 

Purchase  Procedure  Under  Reorganized  System 

The  theory  of  this  reorganization  is  that  the  purchasing  of 
all  standard  articles  of  merchandise  required  by  the  five  main 
War  Department  bureaus  should  be  consolidated  under  one 
purchase  division.  This  is  the  practice  in  all  well  organized 
industrial  and  commercial  concerns  doing  business  on  an 
extensive  scale.  That  was  the  first  feature.  It  did  not, 
however,  rob  the  bureaus  of  their  purchase  of  highly  tech- 
nical material,  such  as  medical  specialties,  and  as  aircraft  and 
ordnance  production  might  require.  Its  second  feature  was 
that  of  storage  and  distribution  of  all  War  Department  sup- 
plies, whether  standard  or  special,  for  issue  within  the  United 
States  and  prior  to  shipment  abroad. 

This  method  of  contracting  involved  a  wide  range  of  ac- 
quaintance with  market  conditions.  It  required  not  only  a 
large  stafT  of  commodity  specialists  but  had  to  have  also  at  its 
service  w^ell  equipped  agencies  for  cost  accounting  and  price 
determining.  On  the  question  of  price  fixing  General  Goethals 
throws  further  light  in  the  testimony  following: 

The  Chairman:  One  thing  we  would  like  to  know,  I  think  all  of  the  members 
of  the  committee  would,  is  who  fixed  the  prices  as  you  observed  on  the  various 
committees  that  were  purchasing  for  the  government,  such  as  subsistence  for  the 
army,  and  quartermaster  stores,  during  the  time  you  were  in  the  Quartermaster 
Department? 

General  Goethals:  At  first  prices  were  fixed  Hy  a  committee  of  the  Council 
of  National  Defense.  As  to  subsistence,  that  was  fixed  by  the  Food  Administra- 
tion, and  subsequently  by  a  committee  of  the  War  Industries  Board. 

The  Chairman:  Had  you,  during  that  time,  or  your  department,  anything 
to  do  with  the  fixing  of  those  prices? 

General  Goethals:  Not  of  the  raw  materials,  but  of  the  manufactured  prod- 
uct, except  when  I  first  went  there  I  went  into  the  market  and  bought  up  clothing 
of  all  kinds. 


70  GOVERNMENT   WAR   CONTRACTS 

The  Chairman:  What  was  your  method  of  procedure?  Did  you  make  requi- 
sitions for  what  you  required,  and  did  those  civilian  committees  get  the  stuff  for 
you? 

General  Goethals:  No;  we  made  purchases  direct  from  the  manufacturers. 
For  instance,  we  purchased  cloth  and  commandeered  all  the  wool  and  allotted  that 
wool  around  among  the  manufacturers  for  them  to  manufacture  cloth  according 
to  the  capacity  of  the  mills.  Prices  were  fixed  by  a  price  fixing  committee.  If  a 
mill  did  not  care  to  take  wool  to  weave  into  cloth  we  simply  commandeered  the 
mill.i 

Reorganization  eliminated  most  of  the  interbureau  competi- 
tion for  commodities  in  the  supply  market,  although  it  did 
not  wholly  relieve  the  government  of  that  reproach.  After  the 
army  had  commandeered  the  wool  supply,  the  army  and  the 
navy  authorities  were  still  competitors  in  the  wool  situation. ^ 
But  the  industrial  situation,  as  related  to  the  government's 
war  needs,  was  immensely  bettered.  The  War  Industries 
Board,  acting  through  its  local  representatives  and  by  the 
aid  of  its  subcommittees  not  only  prevented  the  recurrence  of 
such  abuses  but  aided  materially  in  expanding  the  productive 
capacity  of  industries  in  general  in  furtherance  of  the  muni- 
tions program. 

Another  result  of  the  reorganization  was  the  rejection  of  the 
cost-plus  plan  of  contract.  It  had  been  most  extensively 
used  in  the  earlier  stages  of  the  war.  But  now  business  was 
better  able  to  foresee  costs.  Inordinately  profitable  contracts 
like  those  of  the  automobile  industry  on  Liberty  motors  were 
overhauled  in  the  public  interest.  Contractors  preferred  bid- 
ding to  being  commandeered. 

After  July,  191 8,  the  purchasing  of  supplies  and  the  issuance 
of  orders  and  contract  awards  for  both  the  Quartermaster 
General's  Office  and  the  Ordnance  Corps  was  consolidated 
under  the  Director  of  Purchase,  Storage  and  Trafhc.  Both 
the  Medical  and  the  Engineer  Corps  joined  in  this  arrange- 
ment, excepting  as  to  highly  technical  supplies.  The  organic 
principle  of  this  consolidation  in  the  governmental  supply 
system  involved  the  two  essential  features  of  division  of  labor 
along   lines   of   specialization   by   commodities — a   principle 

'  War  Expenditures  Hearings,  Ser.  I,  part  6,  pp.  525-526. 
2  Ibid.,  p.  522. 


WAR   CONTRACT   OPERATIONS  7 1 

which  found  expression  in  practice  in  the  appointment  of 
army  commodity  committees.  But  how  was  this  more  highly 
specialized  division  of  duties  to  be  coordinated  into  unity  of 
policy?  In  the  Supply  Bulletin,  No.  14,  of  July  30,  this  was 
answered  by  the  creation  of  a  Superior  Board  of  Contract 
Review.  Its  personnel  included  the  Director  of  the  Purchase, 
Storage  and  Traffic  Division,  the  Surveyor  of  Contracts  and 
either  the  chief  procuring  officer  of  each  supply  bureau  or  a 
member  of  the  Board  of  Contract  Review.  The  circular 
says: 

It  shall  be  the  duty  of  the  Superior  Board  of  Contract  Review  to  consider  the 
form  and  policy  of  contracts  and  contracting  methods  of  the  various  bureaus,  to 
pass  upon  particular  contracts  or  other  matters  relating  to  purchase.^ 

The  field  of  the  commodity  specialist  involved  two  kinds  of 
duties  in  contract  work.  One  of  these  was  to  serve  as  special- 
ist in  the  respective  supply  bureaus  which  consolidation  had 
not  obliterated  but  rather  integrated.  In  order,  however, 
that  the  commodity  specialist  might  not  have  too  much  con- 
trol over  awards  of  orders  and  contracts,  there  was  created  a 
Board  of  Contract  Review  in  each  supply  bureau.  Its  duties 
were  "to  approve  or  disapprove  of  the  final  form  of  proposed 
purchase  transactions,  bearing  in  mind  particularly  the  neces- 
sity of  protecting  the  interests  of  the  government  as  to  price, 
terms  and  conditions." 

This  method  of  contract  review  was  especially  designed  to 
give  an  additional  safeguard  against  one  sided  cost-plus 
transactions  on  which  there  had  been  much  criticism.  It 
was  also  purposed  to  take  further  precaution  against  awards 
to  favored  bidders  for  the  prevention  of  possible  mistakes  of 
judgment  of  commodity  committees,  or  of  collusion,  by  giving 
each  proposed  purchase  a  final  review  in  line  with  the  estab- 
lished purchase  and  contract  policy  of  that  particular  bureau. 

The  cost-plus  contracts  came  in  for  another  precaution  in 
the  Supply  Bulletin  of  August  3,  1918.  By  this  it  was 
required  that  proposed  expenditures  for  labor  and  materials 
by  the  contractor,  in  which  there  had  been  some  padding  of 

*  War  Department,  Purchase  and  Supply  Branch,  Supply  Bulletin,  No.  21, 
August  16,  1918. 


72  GOVERNMENT   WAR   CONTRACTS 

costs,  should  "be  approved  in  advance  by  an  approval 
officer  of  the  bureau."  It  provided  that  in  all  supply  bureaus 
in  which  cost-plus  contracts  were  used  to  any  considerable 
extent  there  should  be  established  such  an  approval  officer. 
These  were  to  be  men  competent  to  protect  the  government's 
interests  in  purchases  and  contracts  and  subcontracting  work 
of  whatever  kind. 

The  policy  of  fullest  publicity  for  all  War  Department 
contracts  and  awards  was  restored  officially  as  early  as  August 
3,  1918.  As  outlined  in  Supply  Circular  No.  75,  the  lists  of 
proposed  purchases  for  which  bids  were  desired  had,  for 
military  reasons,  to  be  censored  by  the  Military  Intelligence 
Branch  of  the  General  StafT.  But,  otherwise,  the  status  of 
contractual  publicity  and  competitive  awarding  had  practi- 
cally passed  out  of  the  emergency  stage  peculiar  to  the  earlier 
period  of  the  war,  and  was  now  reorganized  and  reestablished 
on  something  of  the  peace  time  competitive  footing.  The 
Supply  Circular  No.  88,  of  September  7,  1918,  formally 
defined  the  provisions  to  be  inserted  in  all  fixed  price  contracts 
made  by  the  supply  bureaus  of  the  War  Department. 

High    Contracting    Standard    of    the    Engineer    and 

Medical  Corps 

In  up  to  date  contracting  the  Engineer  Corps  of  the  army 
probably  leads  the  War  Department  in  times  of  peace.  Its 
capacity  to  adapt  itself  to  the  requirements  of  war  was 
shown  in  the  quiet,  unobtrusive  adjustment  of  an  excellent 
peace  time  contracting  machinery  to  new  conditions.  This 
great  division  has  always  kept  in  close  contact  with  business 
life  in  its  contract  work,  especially  in  river  and  harbor  improve- 
ment operations,  which  ordinarily  involve  an  outlay  of  tens 
of  millions  of  dollars  annually.  Its  expenditures  in  the  war 
totaled  $640,000,000,  and  of  this  nearly  one-third  was  spent 
in  its  work  with  the  Expeditionary  Forces  in  France.  No 
other  arm  of  the  war  service  spent  so  large  a  proportion  of  its 
total  outlay  abroad.  Its  contracts  and  purchase  orders  were 
extensive  up  to  the  end.  Nor  was  any  other  better  fitted  to 
accomplish  satisfactory  results.     Its  main  service  was  that 


WAR    CONTRACT    OPERATIONS  73 

of  constructing  railways,  building  facilities  for  transport  and 
maintaining  equipment  for  moving  men  and  materials  from 
seaboard  to  the  battlefront  in  the  interior.  It  did  this  with 
but  few,  if  any,  cost-plus  contracts.  In  the  use  of  public 
funds  it  appears  to  have  carried  into  the  emergency  conditions 
of  war  the  high  standards  of  fidelity  and  efficiency  maintained 
during  peace.  From  a  total  of  230  officers  and  1,825  men  on 
April  I,  191 7,  it  expanded  to  10,000  officers  and  284,000  men 
on  November  i,  1918.  An  idea  of  the  scope  of  its  contracting 
operations  may  be  had  from  the  twelve  branches  of  construc- 
tion, repair  work,  quarrying,  forestry,  water  supply  and 
sapper  and  pioneer  work.  In  France  it  created  the  entire 
American  system  of  railroads  and  terminal  facilities  required 
for  the  rapid  handling  of  the  troops,  equipment  and  supplies. 
In  time  of  peace  much  of  its  dealing  is  by  means  of  procure- 
ment orders,  especially  for  standard  commodities  instead  of 
by  formal  written  contracts.  Its  best  known  peace  monu- 
ment is  the  Panama  Canal. 

Among  the  branches  of  service  which  maintained  superior 
contracting  standards  during  the  war  one  must  include  the 
Medical  Corps  of  the  army.  Its  available  appropriations 
during  the  entire  period  of  the  war  amounted  to  $500,000,000. 
It  bought  nothing  without  a  contract  and  made  no  cost-plus 
contracts.  At  the  very  start  it  found  itself  confronted  with 
the  problem  of  improvising  production  in  medical  supplies, 
hospital  equipment  and  other  kinds  of  war  needs.  In  the 
case  of  surgical  needles,  for  instance,  it  was  found  that  there- 
tofore the  German  importers  had  supplied  American  needs. 
There  was  not  a  single  domestic  industry  of  any  considerable 
scale  of  production  in  this  special  line.  The  Medical  Corps 
succeeded  in  enlisting  the  manufacturers  of  sewing  machine 
needles  to  make  the  needed  surgical  instruments.  A  lack  of 
manufacturing  facilities  for  producing  hospital  cots  was 
another  case.  For  that  work  baby  carriage  and  metal  toy 
manufacturing  plants  were  enlisted  with  the  utmost  success. 
In  a  single  plant  where  these  cots  were  made  the  government 
for  this  and  other  articles  had  placed  contracts  amounting  to 
$25,000,000  when  the  armistice  came. 


CHAPTER   II 

Emergency  Construction  Contracts  on  Cost-Plus  Plan 

No  class  of  awards  which  marked  the  nation's  preparations 
for  war  came  in  for  so  much  criticism  as  that  providing  for  the 
building  and  equipment  of  the  army  camps,  cantonments  and 
storage  establishments.  Nor  did  any  other  part  of  the  work 
of  the  army  stand  quite  so  close  to  the  public  interest  as  these 
camps  and  cantonments.  For,  were  not  these  two  kinds  of 
units  in  the  military  preparation  and  training  program  the 
actual  gateways  through  which  the  civilian  youth  and  young 
manhood  passed  into  the  military  milieu?  On  their  way 
thither  to  these  convergent  thresholds  the  drafted  contingents 
of  the  ten  milHon  of  enrolled  recruits  were  still  only  citizens, 
even  after  the  draft;  but  once  within  the  gates  of  camp  or 
cantonment  they  became  something  more — they  were  citizen 
soldiers.  They  were  now  enlisted  in  the  service  not  simply  of 
their  country,  nor  even  only  of  their  continent,  but  in  the 
service  of  the  civilization  of  Christendom.  The  broadest  and 
deepest  public  interest  that  the  nation  had  known  for  half  a 
century  had  for  weeks  and  months  centered  on  these  focuses  of 
training  fervor.  Within  these  folds  the  sons  of  the  people 
were  receiving  the  discipline  and  the  development  of  fighting 
capacity,  such  as  was  intended  to  make  them  more  than  a 
match  for  the  best  seasoned  legions  of  dynastic  Europe. 

Costs  and  Fees  for  Building  Sixteen  Camp  Sites 

Events  moved  swiftly  in  those  days  of  emergency  demands 
on  men  for  prompt  measures.  As  a  result,  much  of  the  criti- 
cism was  in  the  position  of  the  advice  of  the  government 
lawyer  to  the  then  President  Roosevelt,  who  had  directed  the 
removal  of  the  long  objectionable  Union  passenger  station 
from  the  Mall,  at  Washington.  "Very  well,"  assented  the 
President  to  his  obstructive  suggestions,  "you  just  look  up 

74 


WAR  CONTRACT  OPERATIONS  75 

the  law  while  we  tear  down  the  station."  Although  a  full 
month  was  lost  before  the  commanding  generals  of  the 
several  departments  of  the  army  were  directed  to  select  sites 
for  the  construction  of  cantonments  for  the  training  of  the 
mobilized  National  Guard  and  national  army^  on  May  7 — a 
month  after  war  was  declared — the  sixteen  national  army 
camps  were  all  located  in  June,  contracts  were  executed  within 
a  few  days  after  the  selection  of  the  sites,  and  the  various  con- 
tractors had  their  work  in  progress  within  a  few  days  after 
the  awarding  of  the  contracts.  So  that  within  an  average  of 
nine  days  after  the  camp  sites  were  approved  the  contractors 
were  at  work  on  their  projects,  which  averaged  a  little  more 
or  less  than  $8,000,000  each  in  estimated  cost.  The  maximum 
compensation  which  any  contractor  could  get  or  claim  as  his 
profit  was  $250,000,  under  the  terms  of  the  cost-plus  contract 
for  emergency  work.  That  made  the  per  cent  of  the  con- 
tractors' fee  to  the  total  cost  average  just  2.84  per  cent. 
The  following  table  combines  these  results: 

DATES  RELATING  TO  NATIONAL  ARMY  CAMP  SITES,  CONSTRUC- 
TION AWARDS  AND  RATES  PER  CENT  PAID  CONTRACTORS 
ON   COST-PLUS   BASIS2 

Sites        Awards       Work     Per  Cent 
Location  of  Sixteen  Cantonments       Approved      Made        Started    on  Cost 

American  Lake,  Wash.,  Camp  Lewis.  .  .  May  31  June  15  June  14  3-57 

Annapolis  Junction,  Md.,  Camp  Meade  June  22  June  23  July     2  2.38 

Atlanta,  Ga.,  Camp  Gordon June    2  June  11  June  18  3.33 

Ayer,  Mass.,  Camp  Devens May  31  June  11  June  13  2.57 

Battle  Creek,  Mich.,  Camp  Custer  ....  June  11  June  19  June  19  2.87 

Chillicothe,  O.,  Camp  Sherman June  21  June  21  July     6  2.60 

Columbia,  S.  C.,  Camp  Jackson June    2  June  11  June  15  2.86 

Des  Moines,  la..  Camp  Dodge June  27  June  22  June  19  3.67 

Fort  Riley,  Kans.,  Camp  Funston June  13  June  20  2.84 

Fort  Sam  Houston,  Tex.,  Camp  Travis  June  11  June  20  June  14  3.72 

Little  Rock,  Ark.,  Camp  Pike June  11  June  23  June  17  2.77 

Louisville,  Ky.,  Camp  Taylor June  1 1  June  20  June  22  3-55 

Petersburg,  Va.,  Camp  Lee June    8  June  18  June  20  2.20 

Rockford,  111.,  Camp  Grant June  21  June  21  June  24  2.93 

Wrightstown,  N.  J.,  Camp  Dix June    2  June  14  June  12  2.59 

Yaphank,  L.  I.,  Camp  Upton June  18  June  23  June  21  2.20 

The  total  amount  paid  to  contractors  for  the  work  of  con- 
structing these  camps  was  $4,000,000.     Wherever  the  dates 

^Report  of  Secretary  of  War,  1917,  under  "Cantonments,"  "National  Camps," 
etc. 

2  Ibid.,  p.  22;  and  War  Expenditures  Hearings,  Ser.  Ill,  part  2,  p.  115. 


76  GOVERNMENT   WAR   CONTRACTS 

of  Starting  work  are  earlier  than  those  of  the  award,  verbal 
understandings  had  been  reached  and  a  start  made  before  the 
contracts  were  formally  executed  and  delivered.  From  these 
percentages  of  cost  it  is  evident  that  the  rates  of  compensation 
ranged  from  as  low  as  the  minimum  of  2.20  per  cent  at  Camps 
Lee  and  Upton  to  3.72  per  cent  at  Camp  Sam  Houston,  Texas, 
where  one  would  expect  costs  to  be  lower  on  account  of  the 
nearness  of  a  native  lumber  supply.  Evidently  material 
costs  were  not  guarded  any  better  in  Texas  construction  than 
in  the  State  of  Washington,  where  in  another  lumber  district 
the  costs  ran  over  the  average,  reaching  almost  a  maximum 
at  Camp  Lewis,  or  3.57  per  cent.  These  two  camps  together 
with  those  at  Atlanta,  Georgia,  at  Des  Moines.  Iowa,  and  at 
Louisville,  Kentucky — all  within  or  adjacent  to  good  lumber 
regions — proved  to  be  the  most  expensive  as  to  contractors' 
fees.  Probably  labor  costs  would  bear  the  blame  for  excessive 
returns  to  the  contractors ;  yet  at  Camp  Meade  where  carpen- 
ters at  one  time  got  $60  a  week  the  contractor's  fee  was  as 
low  as  2.38— considerably  below  the  average  of  2.84  per  cent. 

Methods  Employed  to  Keep  Down  Costs 

In  the  testimony  of  Brigadier  General  R.  C.  Marshall, 
Chief  of  the  Construction  Division,  War  Department,  before 
the  Subcommittee  on  Camps,  War  Expenditures  Hearings, 
July  14,  1919,  the  methods  of  safeguarding  the  interests  of 
the  government  in  the  original  camps  and  cantonments  were 
described  as  follows: 

General  Marshall:  On  every  job  we  had  a  constructing  quartermaster  and 
his  force,  who  had  as  a  part  of  his  staff  an  engineering  staff  and  an  auditing  and 
accounting  staff,  who  controlled  time  keepers  and  material  checkers  and  who 
inspected  and  watched  the  work  of  the  contractors  continuously  both  as  to  the 
quality  of  the  work  and  conduct  of  the  labor,  and  all  of  the  things  that  enter  into  it. 

General  Marshall:  ...  In  the  original  camp  and  cantonments  we  did 
not  have  that  system  of  checking.  We  considered  ourselves  fortunate  in  being 
able  to  get  this  work  and  produce  the  results  in  the  time  that  it  [sic]  was  produced, 
but  the  cost  of  the  original  camps  and  cantonments  was  not  excessive. 

Mr.  Doremus:  This  system  of  cost  checking — did  it  extend  to  all  the  various 
units  of  construction? 

General  Marshall:  Why,  generally  speaking,  it  did.  In  some  places  it 
was  run  and  kept  up  more  effective  than  in  others;  in  some  places  it  was  very 


WAR  CONTRACT  OPERATIONS  77 

difficult  on  account  of  the  class  of  checkers  we  could  get  to  place  reliance  in  it,  but 
that  was  always  an  indication  of  what  was  going  on,  and  the  cause  for  investigation. 
Not  only  had  we  supervision  of  those  things  on  the  ground  but  from  Washington 
office  inspectors  went  out  periodically  to  go  over  the  job  and  go  over  the  accounts 
to  see  that  there  were  no  wastes  or  excessive  costs. 


Mr.  Doremus:  Looking  back  over  the  period  of  the  war,  General,  are  you 
satisfied  that  everything  that  could  have  been  done  to  safeguard  the  public  interest 
was  done? 

General  Marshall:  Yes,  sir.  I  believe  that  the  government  got  as  near  a 
dollar's  worth  for  every  dollar  spent  as  it  would  be  practicable  to  do  if  we  started 
fresh  today.  The  condition  that  confronted  the  country  at  that  time  was  when 
the  whole  material  market  as  well  as  the  labor  market  was  taxed  to  its  utmost. 
We  were  at  war  and  the  first  duty  of  every  government  agent  was  to  prosecute 
that  war.  The  method  of  conducting  construction  work  or  preparing  elaborate 
plans  and  specifications  or  asking  bids  on  them  and  making  these  awards  was 
absolutely  out  of  the  question.  And  the  method  of  doing  what  is  known  as  the 
purchase-and-hire — purchase  of  material  and  hire  of  labor  by  the  government 
doing  the  work — was  equally  out  of  the  question.  We  were  confronted  with  doing 
thirty-two  jobs,  sixteen  of  which  would  be  at  a  rate  greater  than  the  rate  of  the 
building  of  the  Panama  Canal  in  its  highest  years.  The  other  sixteen  were  about 
half  the  rate,  and  to  attempt  to  organize  thirty-two  construction  outfits  from  the 
material  in  the  hands  of  the  government  and  not  use  the  already  existing  organiza- 
tions, the  commercial  organizations  in  existence,  would  have  been  in  my  judgment, 
the  height  of  folly,  ...  it  would  have  thrown  the  whole  draft  machinery 
out  of  gear.i 

The  Contract  That  Built  Ninety  Per  Cent  of  Building 

Program 

In  the  war  contract  program  for  building  purposes  there 
were  four  distinct  governmental  agencies  each  of  which  had 
developed  a  more  or  less  different  type  of  contract.  Although 
some  contracting  for  this  purpose  was  done  outside  of  these 
limits,  by  the  individual  bureaus  of  the  army  and  navy, 
practically  the  entire  burden  of  building  operations  fell  under 
one  or  another  of  these  groups.  These  included,  in  the  main, 
the  following: 

I.  The  navy,  in  which  a  tremendous  expansion  In  the 
original  program  of  storage  facilities,  and  In  the  building  con- 
struction work  for  the  Bureau  of  Yards  and  Docks  are  the 
outstanding  feature. 

^  War  Expenditures  Hearings,  Ser.  Ill,  part  2,  pp.  115-117. 


78  GOVERNMENT   WAR   CONTRACTS 

2.  The  United  States  Shipping  Board,  principally  through 
the  Emergency  Fleet  Corporation  and  the  board's  Housing 
Committee,  in  the  construction  of  shipyards  and  the  necessary 
buildings  connected  therewith,  including  public  utilities  and 
towns  of  dwellings  for  workers. 

3.  The  United  States  Housing  Corporation,  to  provide 
housing,  local  transportation,  and  other  general  community 
utilities  for  such  industrial  workers  as  are  engaged  in  arsenals 
and  other  industries  in  the  United  States,  including  groups  of 
buildings  for  war  workers  in  the  District  of  Columbia.  These 
comprised  nearly  a  hundred  projects. 

4.  The  Construction  Division  of  the  Quartermaster  Gen- 
eral's Corps  of  the  army,  in  cooperation  with  the  Committee 
on  Emergency  Construction  and  Contracts.  The  latter  was 
originally  a  subcommittee  of  the  Munitions  Board  of  the 
Council  of  National  Defense. 

In  war  time  building  the  last  of  these  four  carried  the  big 
end  of  the  stick.  Between  80  and  90  per  cent  of  the  entire 
governmental  building  program  was  executed  by  this  specially 
organized  construction  unit. 

It  is  worth  while  looking  at  the  outfit  that  put  this  program 
into  effect.  It  represents  in  essential  respects  the  best  type 
of  war  time  contracting  cooperation  between  the  war  author- 
ities and  the  organizations  which  in  the  national  emergency 
sprang  into  the  gap  from  business  life.  It  also  represents 
some  of  the  more  serious  defects  of  the  system  followed.  The 
emergency  construction  division,  with  Col.  I.  W.  Littell  of 
the  regular  army  in  charge,  was  designed  to  be  a  specially 
built  organization  for  providing  quarters  and  camps  for  the 
training  and  housing  of  the  new  national  army.  Around  this 
agency  there  crystallized  in  a  phenomenally  short  time  a 
group  of  military  and  civilian  executives  of  remarkable  con- 
structive capacity.  They  had  a  threefold  task.  First,  they 
had  to  build  a  contract  that  would  meet  the  conditions  and 
see  the  program  through  in  the  course  of  a  single  quarter  year. 
Second,  they  had  to  select  the  contractors  whose  demonstrated 
capacity,  business  integrity  and  control  of  resources,  with 


WAR    CONTRACT    OPERATIONS  79 

secondary  regard  for  the  pecuniary  results,  could  be  abso- 
lutely relied  upon.  Thirdly,  they  had  to  put  the  thing 
through — and  that  thing  was  the  first  fateful  step  in  the  part 
of  the  nation  in  the  world's  war. 

On  the  government's  part  it  was  not  very  well  equipped,  to 
say  the  least.  To  be  sure  there  were  excellent  plans  in  the 
pigeonholes  of  the  Quartermaster  General's  Department,  for 
camp  construction  in  case  of  war.  And  that  department 
itself  had  but  recently  been  organized  on  the  basis  of  the  best 
business  standards.  The  impression  is  still  too  widely  cur- 
rent that  this  arm  of  the  service  was  caught  napping.  But 
that  is  gross  ignorance.  On  the  contrary,  a  complete  and 
thoroughly  thought-out  plan  of  expansion  was  not  only  in 
readiness  but  was  actually  put  into  operation  prior  to  the 
declaration  of  war.  Capacity  to  meet  emergency  conditions 
was  shown  by  the  department  in  abandoning  the  customary 
methods  of  awarding  rush  contracts.  This  was  done  mainly 
at  the  suggestion  of  engineers  in  civil  life  and  construction 
men  whose  combined  experience  was  a  hundred  times  broader 
in  the  field  of  contracting  than  that  of  the  entire  army.  It 
was  seen  that  strict  adherence  to  the  routine  method  might 
result  in  loss  of  valuable  time,  when  time  was  everything  and 
cost  relatively  negligible.  And  it  was  by  reason  of  these 
considerations — considerations  under  which  nobody  dared  to 
take  uncalled  for  chances — that  the  contract  for  emergency 
work  was  constructed  on  the  cost-plus  basis  of  compensation, 
rather  than  through  competitive  bidding. 

Sanitary  considerations  had  much  to  do  with  abandoning 
competitive  bidding  and  lump  sum  compensation.  The 
Quartermaster  Corps  was  determined  to  take  no  chances  on 
this  score.  It  was  determined  to  select  the  healthiest  places 
possible  for  camps,  although  in  some  cases  it  must  have  been 
badly  misled.  But  to  insure  sanitary  construction  the 
advisory  committee  of  town  planners,  water  specialists  and 
sanitary  engineers  both  for  speedy  building's  sake  and  for 
efficiency  of  results,  is  credited  with  inducing  the  war  author- 
ities to  change  from  the  lump  sum  to  the  cost-plus  plan  of 


So  GOVERNMENT   WAR  CONTRACTS 

payment.  They  also  were  credited  with  having  resorted  to 
the  selection  of  contractors  on  the  footing  of  proven  integrity, 
reputation  for  finishing  work  on  time,  equipment,  aptitude  in 
controlling  men,  etc.  This  plan  of  selective  competition, 
they  reasoned,  would  give  them  the  best;  and  why  bother  with 
undependable  candidates  for  jobs  when  the  stakes  were  so 
vital? 


CHAPTER   III 

Why  the  Cost  Plus  Percentage  Fee  Was  Adopted 

A  fortunate  thing  was  this  early  coordination  of  the  Con- 
struction Division  of  the  Quartermaster's  Office  and  of  the 
Corps  of  Engineers  with  leaders  in  the  contracting  and  en- 
gineering ranks  of  civil  life.  Even  before  Congress  had  made 
the  appropriations  for  the  housing  of  its  millions  of  soldiers 
in  the  training  camps,  the  Quartermaster's  Office  had  plans 
in  readiness;  plans,  too,  in  which  departmental  "red  tape" — 
"the  other  fellow's  way  of  doing  it" — was  reduced  to  a  mini- 
mum. These  were  abandoned  almost  overnight.  And  why 
this  sudden  change?  Business  leadership  in  the  contracting 
world  had  come  to  the  War  Department,  pointing  to  such 
achievements  as  the  erection  of  the  training  camp  for  5,000 
officers  at  Fort  Benjamin  Harrison,  Indiana,  in  three  weeks, 
and  a  similar  training  camp  for  2,400  reserve  officers  at  Fort 
Myer,  Virginia,  in  only  two  weeks.  These  were  the  work  of 
contracting  firms  which  had  made  speed  records  in  building 
skyscrapers  in  big  cities,  and  had  proved  their  capacity  to 
perform  wonders  of  speed  in  wood  construction.  All  they 
asked  was  that  the  government,  in  the  uncertainties  of  ad- 
vancing price  levels  and  labor  costs,  should  assume  the  hazards 
of  the  emergency  conditions;  and,  besides  that,  should  cover 
the  overhead  and  compensation  for  the  use  of  the  contracting 
firm's  organization  by  the  payment  of  a  percentage  of  the  total 
costs.  All  of  these  were  to  be  subject  to  the  inspection, 
checking,  cost  accounting  and  control  of  the  army  authorities 
on  the  spot. 

To  summarize,  the  reasons  which  moved  the  department  to 
accept  the  form  of  contract  in  question  were  as  follows  :i 

^  See  Testimony  of  Gen.  I.  W.  Littell,  on  the  Emergency  Construction  Contract, 
Investigation  of  the  War  Department,  Part  7,  pp.  2321-2382. 

81 


82  GOVERNMENT   WAR   CONTRACTS 

(i)  It  was  a  tried  and  proved  method  of  compensation  for 
emergency  work  in  contracting  experience  and  was  so  recog- 
nized among  construction  engineers  of  the  highest  standing. 

(2)  It  enabled  well  equipped  building  organizations  to 
begin  work  almost  instantly  on  essential  parts  of  the  contract 
without  waiting  for  detailed  plans  and  specifications  which 
on  the  fixed  amount  system  must  be  made  the  basis  of  esti; 
mates.  It  was  therefore  a  time  saver  in  an  hour  when  time 
was  almost  everything. 

(3)  It  admitted  of  the  selection  of  contractors  with  special 
regard  to  their  records  of  execution  and  reliability,  as  against 
the  risky  method  of  award  to  the  lowest  bidder  who  might  be 
a  "plunger,"  thus  taking  advantage  of  what  amounted  to  a 
more  efi^ective  kind  of  competition  in  such  selection,  on  the 
basis  of  demonstrated  merit. 

(4)  It — the  cost  plus  percentage  or  fee  system — appealed 
to  the  fair  minded  contractor  on  the  basis  of  an  exceptional 
opportunity  to  make  a  record  of  his  best  work,  because  it 
was  to  be  done  under  conditions  in  which  he  was  released 
from  concern  about  his  own  profit,  and  was  thereby  freed  to 
concentrate  his  efforts  on  the  essential  points  of  speed  of 
execution,  prime  quality  and  the  lowest  cost  practicable 
within  the  accompanying  circumstances  of  war  time  work. 

Points    of    Mutual   Appeal    in    Emergency    Contract 

Not  the  least  illuminating  feature  of  the  emergency  con- 
tract for  camp  work  is  the  otherwise  prosaic  statement  of 
the  viewpoint  of  the  government  and  contractor  as  they  come 
to  a  focus  in  the  preamble.  In  a  few  short  paragraphs  of  the 
document  the  entire  background  of  the  momentous  business 
is  brought  out  into  clear  relief.^  The  rationale  of  the  policy 
which  is  driving  the  man  power  and  the  economic  resources 
of  the  nation  forward  in  a  given  course  is  stated  in  such  clear 
language  as  to  merit  full  quotation  of  its  essential  paragraphs: 

*  War  Department,  Construction  Division,  4th  Edition  of  "Contract  for 
Emergency  Work,"  pp.  i-ii.  Reproduced  also  in  War  Expenditures  Hearings, 
Ser.  Ill,  part  2,  pp.  84-113. 


WAR    CONTRACT    OPERATIONS  83 

Whereas,  The  Congress  has  declared  by  Joint  Resolution  approved  April  6, 
1917,  that  war  exists  between  the  United  States  of  America  and  Germany,  a 
national  emergency  exists  and  the  United  States  urgently  requires  the  immediate 
performance  of  the  work  hereinafter  described,  and  it  is  necessary  that  said  work 
shall  be  completed  within  the  shortest  possible  time;  and 

Whereas,  It  is  advisable,  under  the  disturbed  conditions  which  exist  in  the 
contracting  industry  throughout  the  country,  for  the  United  States  to  depart 
from  the  usual  procedure  in  the  matter  of  letting  contracts,  and  adopt  means  that 
will  insure  the  most  expeditious  results;  and 

Whereas,  The  contractor  has  had  experience  in  the  execution  of  similar  work, 
has  an  organization  for  the  performance  of  such  work,  and  is  ready  to  undertake 
the  same  upon  the  terms  and  conditions  herein  provided; 

Now,  Therefore,  This  Contract  Witnesseth,  That  in  consideration  of  the  premises 
and  of  the  payments  to  be  made  as  hereinafter  provided,  the  contractor  hereby 
covenants  and  agrees  to  and  with  the  contracting  officer  as  follows: 

The  contractor  shall  in  the  shortest  possible  time,  furnish  the  labor,  material, 
tools,  machinery,  equipment,  facilities,  and  supplies,  and  do  all  things  necessarj' 
for  the  construction  and  completion  of  the  following  work: 

Each  of  the  four  editions  of  the  "Contract  for  Emergency 
Work,"  as  the  camp  and  cantonment  contract  was  designated 
in  the  War  Department,  contained  this  identical  statement  of 
the  common  ground  on  which  the  two  parties  to  the  award 
consented  to  work  out  this  urgent  problem  of  military  prep- 
aration. Then  follow  the  several  articles  of  specific  agree- 
ment under  Articles  I  to  XV  inclusive.  These  embody  the 
main  points  around  which  many  years  of  engineering  and 
contracting  experience  had  crystallized.  They  include  such 
topics  as  the  extent  and  cost  of  the  w^ork.  The  factor  of 
cost  was  defined  in  eleven  separate  items,  specifying  the 
things  to  be  included  in  or  excluded  from  the  category  of 
chargeable  costs.  On  these  the  contractor  shall  be  entitled 
to  calculate  his  percentage  of  compensation  for  the  completed 
job.  On  no  point  were  the  public  authorities  more  watchful, 
on  no  phase  of  the  public  accounting  was  there  more  care 
bestowed,  than  on  this  very  one  of  cost  determining.  Other 
articles  cover  the  subject  of  time  and  conditions  of  the  pay- 
ment of  fees  and  reimbursement  of  contractual  outlays 
authorized  by  the  government's  representative,  the  contract- 
ing officer;  the  required  facilities  for  the  inspection  of  records 
and  the  audit  of  accounts;  special  requirements  as  to  the 
time  of  beginning  and  the  prosecution  of  the  work;    the  im- 


84  GO\TERNMENT   WAR  CONTRACTS 

portant  consideration  of  the  conditions  on  which  the  con- 
tracting officer  may  terminate  the  contract  and  put  another  In 
the  contractor's  place;  the  provisions  for  settlement  in  case 
the  work  is  abandoned  as  no  longer  necessary  for  the  emer- 
gency needs  of  the  government,  having  in  mind  the  possi- 
bility of  the  unanticipated  end  of  the  war  or  change  of  plans 
and  policy  in  the  department;  and  finally  the  vexatious 
problems  of  the  hours  and  conditions  of  labor,  the  settlement 
of  disputes  and  the  control  of  subcontracting  or  subletting 
with  approval  or  consent  in  writing  on  the  part  of  the  con- 
tracting officer  of  the  department.  The  highest  fee  earnable 
was  $250,000  on  a  contract  of  $10,000,000  or  over. 

Determination  of  the  Contractor's  Fee 

The  considerations  which  controlled  in  the  construction 
program,  involving  over  300  different  contracts,  balanced 
public  emergency  against  private  opportunity.  The  measure 
of  inducement  was  therefore  of  primary  importance.  The 
situation  of  the  public  Interests  was  set  forth  in  the  foregoing 
analysis  of  contract  as  embodying  three  factors: 

(a)  That  a  national  emergency  existed,  requiring  the  utmost 
urgency  in  the  execution  of  the  work; 

(b)  That  in  the  disturbed  economic  conditions  In  the  con- 
tracting industry  the  usual  legal  procedure  of  competitive 
contract  letting  had  to  be  waived  In  this  class  of  work  in  the 
Interest  of  more  expeditious  performance ;  and 

(c)  That  the  contractor  mentioned  In  the  award  had  the 
requisite  experience,  organization  and  machinery  in  similar 
work  and  was  willing  and  ready  to  undertake  the  job  at  once 
on  terms  specified  In  the  contract. 

This  indicates  the  more  general  ground  of  appeal;  the 
specific  Inducement  was  the  agreed  payments  or  fees,  the  main 
economic  feature  of  which  was  that  he  should  throw  himself 
and  his  organization  into  the  emergency  with  the  agreement 
that  he  should  be  guaranteed  against  losses;  that  he  would 
forego  extraordinary  gains,  and  that  the  government  would 
by  means  of  a  covering  fee  enable  him  to  come  out  even  if 


WAR   CONTRACT   OPERATIONS  85 

not  somewhat  better  in  the  form  of  a  percentage  of  profit  or 
an  equivalent  thereof,  on  the  gross  cost  of  the  project. 

The  fees  were  of  two  kinds  in  the  construction  contracts. 
Either  a  specified  percentage  was  paid  or  a  fixed  sum.  The 
sum  was,  however,  calculated  on  a  percentage  of  the  cost,  in 
the  following  way: 

-     SCHEDULE  OF  COST  PLUS  FEES  FOR  EMERGENCY  BUILDING 

CONTRACTS 

If  the  Cost  of  Work  is  The  Fee  of  Cost  is 

$100,000 7  per  cent 

Over  $100,000  and  under  $125,000 $7,000 

Over  $125,000  and  under  $450,000 6^  per  cent 

Over  $450,000  and  under  $500,000 $29,250 

Over  $500,000  and  under  $1,000,000 6  per  cent 

Over  $1,000,000  and  under  $1,100,000 $60,000 

Over  $1,100,000  and  under  $1,500,000 5§  per  cent 

Over  $1,500,000  and  under  $1,650,000 $82,500 

Over  $1,650,000  and  under  $2,200,000 5   per  cent 

Over  $2,200,000  and  under  $2,450,000 $1 10,000 

Over  $2,450,000  and  under  $2,850,000 4I  per  cent 

Over  $2,850,000  and  under  $3,250,000 $128,250 

Over  $3,250,000  and  under  $4,000,000 4  per  cent 

Over  $4,000,000  and  under  $4,250,000 $160,000 

Over  $4,250,000  and  under  $4,775,000 3f  per  cent 

Over  $4,775,000  and  under  $5,175,000 $179,062.50 

Over  $5,175,000  and  under  $5,725,000 3I  per  cent 

Over  $5,725,000  and  under  $6,225,000 $200,375 

Over  $6,225,000  and  under  $6,825,000 3?  per  cent 

Over  $6,825,000  and  under  $7,400,000 $221,812 .50 

Over  $7,400,000  and  under  $7,750,000 3  per  cent 

Over  $7,750,000  and  under  $8,350,000 $235,500 

Over  $8,350,000  and  under  $8,800,000 2 f  per  cent 

Over  $8,800,000  and  under  $9,650,000 $242,000 

Over  $9,650,000  and  under  $10,000,000 2|  per  cent 

Over  $10,000,000 $250,000 


CHAPTER  IV 

Selection  of  Contractors  under  the  Fee  System 

In  the  spring  of  191 7,  in  the  prewar  stage  of  preparation, 
the  Quartermaster's  Corps  had  proposed  designs  for  a  stand- 
ardized cantonment.  These  had  in  fact  been  worked  out  to 
meet  the  requirements  of  the  National  Defense  Act  of  191 6. 
When  the  war  in  Europe  had  gone  far  enough  to  require  revi- 
sion these  plans  were  reconstructed  in  the  light  of  that  experi- 
ence. One  of  the  changes  was  that  of  adapting  the  plan  to 
meet  the  conditions  of  enlisted  troops,  as  compared  with 
regular  army  troops,  for  which  the  original  plan  had  provided. 
The  purpose  then  still  was  to  build  thirty- two  cantonments  for 
enlisted  troops.  But  the  alarming  rise  in  costs,  the  presence 
in  this  country  of  foreign  missions  to  advise  our  authorities, 
and  the  increasing  influence  of  civilian  advisory  bodies  as 
represented  in  the  Council  of  National  Defense  resulted  in  a 
revision  at  the  eleventh  hour  before  letting  any  considerable 
number  of  contracts.  The  number  of  cantonments  was  thus 
reduced  from  thirty-two  to  sixteen,^  and  the  size  increased. 
The  two  great  changes  were  this  concentration  into  fewer 
training  centers  and  the  adoption  of  an  engineering  method 
of  contract  awarding.  On  these  sixteen  centers,  consisting 
of  1,000  to  1,200  buildings  each, 2 a  total  outlay  of  $128,000,000 
was  to  be  made  within  a  single  season.  The  middle  of  June 
had  slipped  by  before  the  localities  had  all  been  selected.  By 
the  end  of  September  these  buildings  were  to  be  in  such  a 
state  of  completion  as  to  be  used  by  the  incoming  enlisted  men. 
Under  date  of  June  16  the  government  issued  the  first  offi- 
cial information  regarding  the  fee  system  of  the  cantonment 
contracts.  The  entire  army  building  program  included  250 
contracts,  involving  about  $300,000,000  worth  of  construction. 

^  Report  of  the  Secretary  of  War,  191 7,  p.  19. 
2  Ibid.,  p.  23. 

86 


WAR  CONTRACT  OPERATIONS  87 

Methods  of  Mobilizing  Building  Concerns 

This  system,  it  was  stated,  had  been  elaborated  by  the 
department  in  cooperation  with  the  Emergency  Construction 
Committee  of  the  General  Munitions  Board  and  other 
civihan  advisors.  The  latter  were  especially  responsible 
for  the  mobilizing  of  the  contracting  firms  in  the  rush  plan 
of  building  operations.  From  some  three  thousand  ques- 
tionnaires sent  out  an  available  list  of  contractors  had  been 
built  up,  representing  most  of  the  best  in  the  nation.  The 
Council  of  National  Defense,  in  its  reference  to  this  in  its 
first  annual  report,  thus  describes  this  phase  of  work  in  the 
selection  of  contractors: 

From  every  available  source  this  list  has  been  expanded  and  information  built 
up  until  the  committee  has  in  hand  probably  the  most  complete  survey  of  the  con- 
tracting field  that  has  ever  been  made.  From  these  lists,  as  the  various  canton- 
ment sites  were  selected,  recommendations  of  contractors  were  made  by  the  com- 
mittee at  the  request  of  the  Quartermaster's  Department,  and  upon  their  being 
approved  by  the  General  Munitions  Board  the  awards  of  contracts  were  made. 

The  army  policy  in  pursuing  its  building  program  in- 
volved about  $300,000,000  of  outlay  in  construction  under 
about  250  contracts.  The  Construction  Division,  in  giving 
execution  to  the  policy  of  the  department  followed  three 
fundamental  lines,  which  determined  the  kind  of  contractor 
called  for.  These  lines  were  in  large  part  the  result  of  ad- 
visory cooperation,  and  included  the  following  features: 

(i)  A  strong  administrative  and  supervisory  organization. 

(2)  An  elastic  form  of  contract  which,  while  suitably  com- 
pensating the  contractor,  should  not  attempt  to  unload  upon 
him  the  risks  incident  to  the  indecision  and  haste  of  the  gov- 
ernment's predicament;  in  other  words,  that  the  government 
should  carry  its  own  risk. 

(3)  The  employment  of  contractors  of  suitable  integrity, 
experience  and  going  organization. 

It  was  recognized  from  the  start  that  so  stupendous  a  pro- 
gram demanded  the  awarding  of  contract  to  concerns  accus- 
tomed to  handle  the  largest  kinds  of  undertakings.  The 
type  of  contractor  needed  was  of  those  who  had  the  resources 


88  GOVERNMENT  WAR   CONTRACTS 

and  the  organizations  to  put  through  $3,000,000  to  $5,000,000 
worth  of  work  in  a  few  months.  The  Quartermaster's  Office 
availed  itself  of  the  services  of  an  advisory  board  of  con- 
tracting engineers,  and  that  afforded  a  fairly  good  sort  of 
insurance  against  jobs  falling  into  the  hands  of  concerns  for 
which  the  projects  were  beyond  their  capacity,  resources  or 
equipment.  In  short,  these  were  jobs  for  giants  accustomed 
to  operate  on  a  titanic  scale,  in  which  quick  action  and  effect- 
ive quality  of  work  could  be  practically  guaranteed.  Natu- 
rally those  who  had  done  things  great  in  the  past  could  be 
counted  on  most  likely  to  meet  the  greater  emergency  in  the 
present.  This  directness  of  action,  this  straightforward 
judgment,  this  shutting  out  of  politics,  was,  however,  the  very 
type  of  procedure  which  would  call  forth  criticism,  as  soon  as 
it  was  seen  that  the  old  beaten  paths  were  forsaken  for  the 
immediate  meeting  of  national  needs.  This  inevitable  criti- 
cism came  in  the  natural  but  sensational  outcry  in  the  name 
of  economy  which  found  voice  mainly  in  the  investigations  of 
the  Senate  Committee  on  Military  Affairs  and  other  exposes 
late  in  191 7  and  during  most  of  the  year  following,  into  this 
and  other  fields  of  government  contracting. 

Criticisms   of  the   Cost-Plus   Contracts 

Criticisms  were  aimed  at  this  contract  for  various  reasons. 
Of  most  frequent  occurrence  was  that  of  the  fees  allowed 
being  too  low.  To  this  Colonel  Littell,  in  his  official  announce- 
ment of  the  plan  and  details,  had  reference,  when  he  said: 

This  carefully  graded  scheme  (of  fees  ranging  from  2|  to  7  per  cent  on  costs) 
will,  of  course,  not  be  satisfactory  to  some  contractors,  and  we  have  naturally 
received  many  protests  against  the  low  fees.  It  is  a  satisfaction  to  know,  however, 
that  the  great  majority  of  the  reputable  firms  have  assented  loyally  and  patriot* 
ically  to  the  government's  determination  to  take  radical  precautions  against  excess- 
ive profits.  The  criticisms  of  the  few  are  perhaps  the  best  evidence  we  could 
have  of  the  care  the  government  is  taking  for  the  cantonments.^ 

The  judgment  of  the  engineering  profession  was  favorable 
to   the  system   thus  developed  out  of  an  official   situation 

^Official  Bulletin,  June  10,  1918,  gives  report  of  the  Talbot  Commission 
March  15,  1918,  explaining  and  approving  the  use  of  the  cost-plus  contract. 


WAR  CONTRACT  OPERATIONS  89 

marked  by  inaction  and  confusion.  There  was  probably 
no  better  statement  of  the  government's  position  in  point  of 
business  sense  than  the  following  from  one  of  the  leading 
technical  journals: 

Of  course  this  method  of  procedure  will  have  its  critics.  There  will  be  cries  of 
favoritism  and  excessive  costs.  As  to  the  former  we  must  depend  for  a  square 
deal  upon  the  Quartermaster  Department  officials  and  their  civilian  advisers. 
In  the  matter  of  cost  we  must  realize  at  the  outset  that  emergencies  such  as  the 
present  one  are  not  times  for  bargain  hunting.  We  want  work  on  a  vast  scale 
done  in  an  incredibly  short  time,  and  we  will  have  to  pay  for  it.  With  the  labor 
and  material  market  in  its  present  condition,  and  tending  no  one  knows  whither, 
it  is  safe  to  say  that  only  the  most  reckless  type  of  contractor  would  gamble  on  the 
camp  jobs  with  the  usual  hard  and  fast  kind  of  agreement.  And  it  is  the  reckless 
contractor,  who  will  take  a  chance  on  going  broke  who  should  be  kept  off  this  rush 
camp  construction.  The  government  doesn't  want  work  started,  suspended,  and 
finished  way  behind  schedule  by  the  bondsmen  of  a  broken  contractor.  It  is 
work  for  picked  men,  men  whose  ability  on  large  scale  undertakings  has  been 
demonstrated  by  past  performances.  There  is  a  plentiful  supply  of  contractors 
qualified  to  handle  the  camp  construction  and  finish  it  on  time,  provided  useless 
cogs  are  eliminated  from  the  administrative  machinery,^ 

Much  of  the  protest  and  criticism  of  these  methods  and 
awards  had  no  other  basis  than  the  idea  that  the  government 
represented  in  the  Emergency  Construction  Committee  was 
driving  a  hard  bargain  with  the  contractor  in  the  interest  of 
speed  and  economy.  Sympathy  on  behalf  of  the  "poor" 
contractor  is  obviously  wasted.  A  general  complaint  of  the 
committee's  discriminating  against  local  contractors  is  con- 
futed by  the  fact  that  one  of  its  cardinal  principles  of  operation 
was  to  select  contractors  familiar  with  local  conditions  and 
resources,  provided  there  were  firms  of  the  requisite  caliber 
within  the  district. 

The  criticism  that  excessive  rates  of  wages  were  paid  had 
more  foundation  in  fact.  But  ample  justification  was  found 
in  the  demoralized  condition  in  which  two  years  of  European 
war  contracting  had  left  the  labor  market.  By  turning  col- 
lective bargaining  on  the  part  of  labor  over  to  a  virtual 
monopoly  of  labor  leaders  in  the  American  Federation  of 
Labor  a  stabilizing  factor  was  introduced,  although  adjust- 
ments of  wage  levels  were  ahvays  made  upward.     The  draft 

^  Editorial  in  Engineering  News-Record,  Vol.  78,  No.  10,  June  7,  1917,  p.  514. 


90  GOVERNMENT   WAR   CONTRACTS 

law  was  now  in  full  operation,  drawing  workers  away  to  these 
very  cantonments  as  soldiers.  Arsenals,  shipyards,  munition 
factories,  mines  and  railways,  lumbering  camps  and  mills  and 
civil  and  military  occupations  were  all  in  the  market  for  labor. 
In  scouring  the  country  the  different  agencies  of  the  govern- 
ment rivaled  each  other,  so  that  shipyards  and  munition 
plants  bid  against  each  other,  especially  in  the  Philadelphia 
district  and  on  the  Pacific  Coast.  Nothing  short  of  the 
lamp-post  kept  some  of  the  agitators  from  fomenting  discord 
among  workers  whose  conditions  of  housing  gave  fertile  ground 
for  discontent.  Profiteering  by  landlords  was  one  of  the 
most  flagrant  of  transgressions  against  public  interest.  Nev- 
ertheless the  construction  program  triumphed. 

Professional  versus  Traditional  Methods  of  Selection 

From  the  very  start  the  War  Department  felt  that  an 
explanation  was  due  the  public  for  departing  from  its  tradi- 
tional methods  of  awarding  contracts  for  the  sixteen  canton- 
ments. The  older  method  consisted  of  presenting  a  full  set 
of  specifications  with  advertising  for  bids,  to  be  opened  at  a 
more  or  less  distant  date  at  a  specified  place,  all  of  which  was 
followed  by  a  thorough  comparison  of  bids  and  finally  a 
selection  of  the  successful  competitor  to  do  the  work  for  a 
lump  sum  amount.  He  was  presumably  the  lowest  bidder, 
whatever  else  he  might  be.  Part  of  the  delay  in  getting  these 
projects  started  was  due  to  the  determination  of  the  Quarter- 
master Department  to  make  these  camps  the  healthiest  pos- 
sible places,  and  to  do  so  it  was  not  deemed  best  to  bind  the 
hands  of  the  government  by  any  fixed  sum  contract,  thus 
abridging  their  freedom  to  make  changes.  The  advisory  com- 
mittee of  town  planners,  water  specialists  and  sanitary  engi- 
neers, both  for  speedy  building's  sake  and  for  efiiciency  of 
results,  is  credited  with  inducing  the  war  authorities  to  change 
from  the  lump  sum  to  the  cost-plus  plan  of  payment,  and  of 
selecting  the  contractors  on  the  basis  of  integrity,  reputation 
for  finishing  work  on  time,  equipment,  aptitude  for  controlling 
men,  etc. 


WAR   CONTRACT   OPERATIONS  9 1 

Of  course,  it  took  time  to  establish  beforehand  all  the  pre- 
cautions and  checks  required  to  make  this  newer  method 
work  with  as  little  friction  as  possible.  First  of  all  was  the 
problem  of  how  to  pick  out  the  desired  kind  of  contracting 
firms,  now  that  the  open  field  competitive  method  had  been 
rejected  as  the  means  of  selection  for  that  of  selective  com- 
petition. For  that  purpose  the  Quartermaster,  acting  with 
his  advisory  committees,  sent  a  questionnaire  to  all  of  the 
leading  contractors  of  the  country  for  information  about 
their  activities  in  the  past  three  years,  what  sized  projects 
they  had  handled,  how  large  a  force  of  men  they  could  main- 
tain on  a  job,  along  with  a  summary  history  of  the  firm's 
achievements.  In  addition  thereto,  leading  engineers  and 
architects  were  asked  to  state  confidentially  what  their  ex- 
perience had  been  with  each  contractor  under  consideration. 
On  this  material  one  of  the  ablest  and  best  judges  of  con- 
tractors in  the  country  was  asked  to  pass  judgment.  His 
specialty  had  been  to  judge  of  contractors  for  the  leading  secur- 
ity and  guaranty  companies  of  the  country.  Every  contract 
awarded  had  the  advantage  of  the  judgment  of  such  superior 
technical  talent  as  to  the  advisability  of  accepting  or  of 
rejecting  the  offer  of  the  contractors.  These  advisers  worked 
without  pay.^ 

^  Official  Bulletin,  June  9,  1917,  p.  16. 


CHAPTER  V 

Did  the  Emergency  Construction  Contracts  Make  Good? 

It  is  hardly  necessary  to  raise  the  question  whether  these 
emergency  contracts  really  made  good.  Yet,  as  a  vital  part 
of  the  preparation  for  war,  it  deserves  straightforward 
answer.  The  responsibility  for  this  program  the  Council  of 
National  Defense,  of  which  the  Secretary  of  War  was  the 
chairman,  placed  upon  the  Committee  on  Emergency  Con- 
struction and  Contracts  almost  instantly  after  war  was 
declared.  That  was  organized  April  28,  191 7,  and  soon  there- 
after Major  W.  A.  Starrett,  of  the  United  States  Reserves, 
formerly  a  construction  engineer,  was  placed  at  its  head. 
This  small  committee  of  five,  which  cooperated  with  the 
Army  Construction  Division,  represented  as  high  an  order  of 
large  scale  building  talent  as  one  could  wish,  including  an 
army  representative  from  the  United  States  Engineer  Corps. 

It  was  made  their  duty — 

« 

To  suggest  forms  of  day-work  contracts  applicable  to  the  construction  of  can- 
tonments and  similar  enterprises  where  rapidity  in  construction  is  essential;  to 
formulate  plans  and  methods  of  expediting  the  construction  of  housing  facilities 
in  connection  with  engineering  and  construction  work  and  activities  essential 
thereto.^ 

Official  Estimate  of  Contractual  Results 

In  reviewing  the  situation  at  this  critical  juncture  of  the 
war  plans,  the  Council  of  Defense  officially  states  that  it  be- 
came apparent  at  once  that  the  ordinary  method  of  advertis- 
ing for  bids  and  awarding  the  contract  to  the  lowest  bidder 
could  not  be  followed,  because  of  the  necessity  of  getting  the 
work  under  way  at  once  prior  to  the  development  of  completed 
plans  and  specifications  which  could  be  used  as  a  basis  for 
competitive  estimates.     Construction  and  designing  had  to 

'  First  Annual  Report,  Council  of  National  Defense,  191 7,  p.  24. 

92 


WAR   CONTRACT   OPERATIONS  93 

go  on  concurrently,  and  since  no  existing  form  of  government 
contract  met  this  situation  a  new  form  fitting  the  conditions 
had  to  be  drawn.  ^  Thus  the  cost-plus  type  of  agreement 
came  into  general  use.  Under  it  the  sixteen  national  army 
camps  (cantonments)  were  built  at  an  average  estimated  cost 
of  about  $8,000,000,  and  sixteen  National  Guard  camps  at 
the  average  cost  of  about  $1,900,000.  The  buildings  of  the 
former  covered  an  area  of  2,000  acres  and  the  rifle  ranges,  drill 
grounds,  etc.,  as  large  an  area  in  addition.  In  the  housing 
of  the  40,000  men  for  each  cantonment  the  regimental  units 
each  called  for  fifty-nine  buildings,  consisting  of  twenty-two 
infantry  barracks,  six  officers'  quarters,  two  storehouses, 
twenty-eight  lavatories  and  one  infirmary  building.  Besides 
these  there  were  divisional  headquarters  at  each  camp,  also 
quartermaster  depots,  distributing  station  and  base  hospi- 
tals, having  1,000  beds  each.  There  were  twenty-five  miles 
of  road  to  build,  sewer  facilities  to  install,  water  supplies  to 
construct — in  short,  to  build  housing  accommodations,  stores 
for  supplies,  public  utilities  and  administrative  buildings  for 
sixteen  cities  of  the  size  of  Taunton,  Massachusetts,  Wheeling, 
West  Virginia,  or  Quincy,  Illinois.  And  all  of  this  in  not  over 
four  full  months  of  time!  Besides  these,  the  sixteen  National 
Guard  camps,  where  the  men  were  quartered  under  tents,  the 
buildings,  though  less  numerous,  called  for  extensive  construc- 
tion of  modern  storehouses,  mess  shelters,  lavatories  and 
baths,  heating  and  lighting  systems,  in  addition  to  two  em- 
barkation and  one  quartermaster  training  camps.  Speaking 
of  the  result,  the  Secretary  of  War  thus  summarizes: 

In  the  main,  the  work  has  been  thoroughly  successful.  When  its  magnitude  is 
appreciated,  the  draft  it  made  upon  the  labor  market  of  the  country,  the  speed 
with  which  it  was  accomplished,  and  the  necessity  of  assembling  not  only  materials 
but  men  from  practically  all  over  the  country,  it  seems  not  too  much  to  say  that 
the  work  is  out  of  all  proportion  larger  than  any  similar  work  ever  undertaken  in 
the  country,  and  that  its  completion  substantially  on  time,  is  an  evidence  of  effi- 
ciency both  on  the  part  of  those  officers  of  the  government  charged  with  responsi- 
bility for  the  task  and  the  contractors  and  men  of  the  trades  and  crafts  employed 
to  carry  on  the  work.^ 

^  First  Annual  Report,  Council  of  National  Defense,  1917,  p.  24. 
2  Annual  Report  of  the  Secretary  of  War,  1917,  p.  28. 


94  GOVERNMENT   WAR   CONTRACTS 

Cooperative  Morale  a  Dominating  Factor 

To  the  cooperative  character  of  the  camp  construction 
organization  one  has  to  look  for  the  main  cause  of  the  success 
attending  its  program.  First,  the  Construction  Division  of 
the  army  and  the  Emergency  Construction  Committee,  the 
official  and  the  advisory  agencies  in  direct  charge,  worked 
together  with  remarkable  accord.  Second,  the  government's 
representative  and  the  contractors  understood  each  other 
and  jointly  put  their  best  efforts  into  the  job.  An  engineering 
observer,  speaking  of  this  phase  of  the  cooperative  method  of 
work,  writes: 

No  more  gratifying  experience  is  vouchsafed  to  the  interested  observer  on  a 
large  construction  project  than  to  see  an  experienced  constructing  quartermaster 
working  with  a  good  contracting  organization.  They  came  to  the  job  with  a  sim- 
ilarity of  point  of  view.  The  technical  points  they  both  understand  and,  there- 
fore, they  talk  a  common  language.  They  understand  the  orderly  process  of 
organization  and  relative  responsibility;  the  sense  of  stewardship  on  the  part  of 
the  government  officer  is  met  by  one  of  strict  accountability;  each  has  his  duties 
and  both  work  to  a  common  end,  the  rapid  and  economical  completion  of  the 
work.^ 

To  those  who  could  catch  the  vision  of  the  end,  without 
being  led  astray  by  the  offending  but  incidental  abuses  incident 
to  big  but  urgent  works,  there  was  evident  in  this  whole  group 
of  projects  something  of  the  fighting  spirit  that  inspired  the 
officers  and  soldiers  for  whose  service  these  cities  for  training 
were  being  built.  Nor  was  it  simply  among  the  officers  and 
contracting  officials  that  this  equivalent  of  the  fighting  spirit 
under  civilian  garb  manifested  the  cooperative  principle  of 
effort.  Among  the  rank  and  file  of  men  in  overalls  there  was 
the  same  quiet  undertow  of  unity  of  aim.  And  of  these  too, 
as  well  as  of  the  engineers,  it  may  equally  be  said: 

It  was,  therefore,  only  natural  that  in  going  over  the  work  we  heard  so  much 
discussion  of  the  economies  and  saw  the  fighting  everywhere  to  keep  the  costs 
down.  And  these  are  of  the  type  that  went  forward  to  our  first  battle,  a  battle 
against  the  elements.  A  battle  to  erect,  almost  over  night,  the  great  construction 
projects  that  were  needed  all  over  the  country  that  our  army  could  be  called,  that 
our  munitions  could  be  made,  that  our  aviators  could  be  trained,  and  that  our 
supplies  could  be  handled. 

That  there  was  waste  is  admitted,  but  that  this  waste  would  occur  was  most 
clearly  seen.     .     .     .     They  saw  the  problem  and  met  it  squarely,  not  in  the  fatu- 

';"The  Construction  Division  of  the  United  States  Army,"  by  W.  A.  Starrett, 
Scientific  American,  September  28,  1918,  p.  252. 


WAR   CONTRACT    OPERATIONS  95 

ous  hope  that  they  would  in  all  cases  produce  lOO  per  cent  efficiency,  but  rather 
with  the  practical  realization  that  they  would  give  their  best  in  stemming  to  the 
utmost  the  waste  that  was  inevitable.  Beyond  that,  they  went  in  with  high  re- 
solve that  they  would  deliver  to  the  government,  in  time  and  adequately,  the  vast 
building  program  on  which  our  very  existence  depended.  They  are  willing  to 
abide  by  the  result. i 

Theory  of  the   Graduated   Percentage  Fee  Contract 

The  general  theory  of  governmental  war  contracts,  it  has 
been  pointed  out,  makes  military  necessity  the  paramount 
consideration  within  the  limits  of  law.  In  the  effort  to  work 
out  a  form  of  construction  contract  adapted  to  meet  war  con- 
ditions the  problem  was  that  of  commanding  the  most  com- 
petent agencies  available  to  perform  a  most  urgent  under- 
taking within  the  shortest  period  of  time.  Certainty  of 
result  was  essential.  To  that  end  risks  had  to  be  concen- 
trated on  the  side  of  administrative  control,  and  withdrawn 
from  the  side  of  executive  performance.  Whatever  might 
handicap  the  speed  or  quality  of  performance  must  be  local- 
ized on  the  administrative  side  of  the  contractual  equation. 
Transpositions  of  the  contractual  factors  had  then  altogether 
to  be  adjusted  to  the  standards  of  laws  and  regulations,  by 
consultation  with  the  legal,  the  auditing,  the  financial  and  the 
judicial  criteria  of  valid  contracting.  As  a  result  of  these 
conditions  the  cost  plus  percentage  fee  contract  became  the 
standard  in  most  general  though  not  exclusive  use  for  the 
army's  building  program.  In  substance,  the  resulting  agree- 
ment was  a  sort  of  "honorable  partnership"  between  the 
employer  and  contractor;  an  arrangement  in  which  the  em- 
ployer carried  his  own  risks  and  secured  thereby  the  services 
of  the  contractor  and  his  organization.  Engineering  experi- 
ence in  the  contracting  field  had  found  that  the  interests  of 
equity  and  execution  had  become  so  well  balanced  by  this 
plan  as  to  make  one  of  the  most  acceptable  forms  of  contract. ^ 
The  cost-plus  contract  was  not,  therefore,  an  experiment;  its 
value  had  been  demonstrated  in  the  wider  field  of  commercial 
experience. 

1  Scribner's  Magazine,  "Building  for  Victory,"  November,  1918,  pp.  546-547. 

*  See  testimony  of  Dwight  P.  Robinson,  President  American  International 
Shipbuilding  Corporation,  on  the  agency  type  of  the  Cost-plus  Contract,  Senate 
Committee  on  Commerce  Hearings,  65th  Cong.,  2d  Sess.,  on  Sen.  Res.  170,  vol.  2, 
pp.  2013-2016. 


CHAPTER  VI 
Army  Ordnance  Contracts 

In  the  support  of  the  military  establishment  of  the  country 
the  expenditures  for  the  Ordnance  Department  stand  second 
in  importance  only  to  the  outlays  for  the  Quartermaster  Corps. 
This  department,  from  April  6,  1917,  to  June  i,  1919,  had  at 
its  disposal  credits  to  the  amount  of  $4,142,483,822.16. 
That  made  nearly  28.5  per  cent  of  the  entire  amount  expended 
by  the  War  Department  during  the  period  of  hostilities. 
The  Quartermaster  Corps  expended  in  the  same  time  almost 
exactly  twice  as  much.  All  except  9  per  cent  of  the  ordnance 
outlays  were  made  in  the  United  States,  the  amount  being 
$3^783.345.386.02,  as  against  $359,134,436.14  for  the  Ameri- 
can Expeditionary  Forces.^ 

Distribution  of  contract  items  of  $100,000,000  or  over, 
each,  among  the  several  features  of  expenditure,  shows  that 
ordnance  stores,  mainly  ammunition,  led  with  $720,740,000 
in  round  numbers.  Automatic  rifles  required  $534,320,000; 
ordnance  stores  and  supplies  $354,440,585;  small  arms  target 
practice,  $188,276,000;  the  manufacture  of  arms,  $161,041,- 
100;  armored  motor  cars,  $117,300,000,  leaving  the  next  to 
the  largest  item  of  $600,000,000  to  settle  contract  obligations 
outstanding  when  the  armistice,  on  November  11,  1918,  was 
signed.  That  event  suddenly  halted  the  industrial  opera- 
tions and  automatically  canceled  many  thousands  of  con- 
tract undertakings.  These  apportionments  are  from  the 
fiscal  years'  summary  of  total  appropriations  of  1917,  1918 
and  1919.2 

The  making  of  munitions  and  of  their  supplementary 
requirements  is  primarily  an  industrial  task.     The  credit  of 

^  War  Expenditures  Hearings,  Ser.  I,  part  i,  p.  40. 
'Ibid.,  pp.  lo-n. 

96 


WAR  CONTRACT  OPERATIONS  97 

furnishing  these  direct  implements  of  fighting  belongs  to  the 
manufacturing  forces  of  the  nation.  Nor  is  the  achievement 
simply  a  matter  of  machinery ;  it  was  the  spirit  rather  of  the 
men  and  women  back  of  the  machines  that,  under  the  colossal 
contractual  relations  with  the  government,  drove  home  the 
end  of  the  war  to  the  final  stage  of  victory.  The  manufac- 
turing industries  of  the  country  were  placed  at  the  country's 
service  from  the  earliest  prospect  of  war.  Typical  of  the 
entire  morale  which  dominated  the  American  contracting 
forces  at  home  were  the  words  of  Samuel  M.  Vauclain  of 
Philadelphia.  In  conference  with  the  Ordnance  Department 
authorities,  weeks  before  Congress  had  voted  funds  for  ammu- 
nition and  arms  on  the  big  scale  required,  he  met  the  difficulty 
of  anticipating  appropriations  by  the  pledge:  "We'll  make 
the  rifles — you  make  the  contracts," 

There  are  several  other  aspects  from  which  the  subject  of 
ordnance  contracting  should  be  considered.  It  is  necessary 
to  understand  the  main  features  at  least  of  the  position  of  the 
Ordnance  Office  as  a  contracting  authority  when  the  war 
broke  out,  with  special  regard  to  its  capacity  to  meet  its 
legally  defined  duties,  to  determine  its  own  problem  and  to 
meet  the  demands  of  the  military  situation  as  it  developed 
both  at  home  and  abroad  in  the  light  of  the  International 
Ordnance  Agreement  of  December,  1917.^ 

Again,  what  were  the  character  and  scope  of  the  contractual 
system,  relations  and  organization  as  developed  in  the  working 
out  of  this  problem  by  means  of  the  department's  own  arse- 
nals and  the  industrial  organizations,  commercial  agencies  and 
financial  institutions  of  the  country? 

Finally,  what  policy  peculiar  to  the  Ordnance  Department 
was  pursued  in  the  liquidation  of  war  era  assets  in  the  post- 
armistice  period,  involving  cancelation  of  contracts,  salvaging 
of  supplies  and  settlement  of  accounts  with  the  contracting 
public,  while  the  demobilization  was  going  on  in  the  transi- 
tion to  conditions  of  peace? 

^America's  Munitions:  Report  of  Benedict  Crowell,  Director  of  Munitions, 
1917-1918,  pp.  14-15.     Washington,  1919. 


98  government  war  contracts 

Situation  of  Ordnance  Office  at  Outbreak  of  War 

The  position  of  the  Army  Ordnance  Department  at  the 
outbreak  of  hostilities  with  Germany  is  a  sad  commentary 
on  the  popular  conceit  of  self-sufhciency  of  our  military 
establishment  even  on  a  peace  basis.  The  disease  was  the 
usual  failure  of  the  department  to  develop  apace  with  the 
progress  of  national  needs  and  worldwide  changes.  Mean- 
while, the  Chief  of  Ordnance  had  for  fifteen  years  been  plead- 
ing with  his  superiors  in  authority  to  enable  him  to  increase 
his  personnel  and  assistants,  to  have  in  readiness  a  reserve  of 
the  basic  tools  and  of  technically  equipped  officers  in  sufficient 
numbers  to  place  government  arsenals  and  private  contracting 
industries  on  a  war  time  scale  of  production  of  munitions  at 
very  short  notice.  As  has  been  pointed  out  elsewhere,  its 
designing  force  was  pitiably  insufficient  to  keep  up  with  the 
rapidly  developing  experience  of  the  nations  in  fighting 
materiel.  Owing  largely  to  the  failure  to  meet  the  expressed 
need  of  additional  officers,  the  equally  important  work  of 
manufacturing,  inspection  and  other  engineering  lines  of 
work  fared  likewise.  The  plea  of  the  Ordnance  Office  that 
the  increments  of  officers  authorized  by  Congress  in  the  act  of 
June  3,  1916,  over  a  five-year  period,  be  expedited  by  taking 
advantage  of  the  emergency  provision  in  the  act  giving  the 
President  authority  to  make  such  increase  at  once,  was  met 
by  an  obstructive  and  sophistical  opinion  of  the  law  author- 
ities of  the  department  handed  down  months  later,  on  Decem- 
ber 26,  1 91 6.     That  opinion  ran  as  follows: 

However  great  may  be  the  need  of  an  increased  personnel  in  the  Ordnance 
Department  to  meet  the  existing  situation,  it  is  not  such  an  emergency  as  the 
statute  contemplates.  .  .  .  That  the  report  of  the  Chief  of  Ordnance  does  not 
state  a  condition  that  can  be  regarded  as  an  emergency  authorizing  the  President 
to  organize  an  increase  of  the  Ordnance  Department  under  the  first  proviso  of 
section  24  of  the  national  defense  act;  and  that,  unless  there  is  an  emergency  not 
disclosed  in  these  papers,  a  remedy  can  be  afforded  only  in  legislative  action. 

Under  this  ruling  the  Chief  of  Ordnance  waited  until  the 
day  after  the  break  of  diplomatic  relations  with  Germany  on 
February  3  to  renew  his  plea  for  recognition  of  an  emergency 
situation,  only  to  result  in  more  legal  hairsplitting  in  the 


WAR  CONTRACT  OPERATIONS  99 

Judge  Advocate  General's  letter  of  February  9,  to  which  the 
Secretary  of  War — another  lawyer — subscribed  in  the  follow- 
ing ofificial  language: 

Opinion  approved:  As  Congress  is  in  session  and  is  considering  this  question 
no  present  use  of  the  discretion  of  the  President  will  be  sought. 

Baker. 

In  the  face  of  this  enforced  attitude  of  ignoring  actualities 
the  Ordnance  Office  had  undertaken  a  survey  of  manufactur- 
ing establishments  which  would  most  likely  be  able  to  produce 
the  supplies  wanted  without  any  great  changes  in  their  ma- 
chine equipment.  A  series  of  conferences  and  consultations 
was  conducted  between  the  department  and  industrial  con- 
cerns during  most  of  the  entire  year  before  war  was  declared. 
General  Crozier,  then  Chief  of  Ordnance,  testified,  in  the 
inquiry  of  1919,  that  from  the  autumn  of  1916  contracts  had 
been  entered  into  with  private  concerns  for  the  various  kinds 
of  munitions.  These  included  artillery,  artillery  ammunition, 
small  arm  ammunition,  powder  and  equipments,  including 
cartridge  belts,  etc.  But  of  greater  importance  than  any 
other  single  implement  of  war,  even  than  the  machine  gun, 
he  considered  the  infantryman's  rifle.  For  the  making  of 
these,  three  establishments  which  had  been  manufacturing 
rifles  for  European  governments  were  found  to  be  practically 
in  readiness.  Prior  contracts  had  been  awarded  for  the  sup- 
ply of  manufacturers'  tools  and  gauges  although  to  an  insuf- 
ficient extent.  These  were  under  the  appropriations  of  191 6 
and  of  191 7,  the  last  of  which  was  made  available  in  the  act 
of  July  I,  1916.  Between  August  29,  1916,  and  April  6,  1917, 
orders  and  contracts  of  $100,376,973  net  allotment  were  let, 
and  4,000  placed  within  the  next  eight  months.^ 

The  first  task  after  getting  the  more  urgent  contracts  under 
way  appeared  to  be  the  long  deferred  increase  in  personnel  by 
which  to  carry  on  the  enlarging  work  of  the  office.  Within 
a  year  the  Ordnance  list  of  officers  increased  from  96  to  4,000, 
and  in  a  year  more  to  5,000.^     A  force  of  five  officers  and 

'  See  General  Crozier's  Testimony,  Investigation  of  War  Department,  Decem- 
ber 12-31,  1917,  Part  I,  pp.  225-242  for  list  of  contracts. 
^  War  Expenditures  Hearings,  Ser.  I,  part  5,  p.  459. 


100  GOVERNMENT   WAR   CONTRACTS 

twenty  clerks  was  required  to  work  day  and  night  making  out 
commissions  and  examining  applications.  Most  of  these  were 
set  directly  to  making  out  contracts,  at  the  rate  of  twenty  a 
day  for  the  first  eight  months  of  the  war.  By  far  the  greater 
proportion  came  from  civil  life.  They  included  engineers, 
business  men,  financiers,  bank  presidents,  college  and  univer- 
sity professors,  chemists  and  metallurgists,  and  lawyers,  who 
were  of  special  service  in  contract  drawing.  These  newly 
appointed  officers  served  as  assistants  to  the  regular  officers 
in  charge  of  the  several  purchase  and  supply  divisions  of  the 
Ordnance  Department.  For  that  reason  there  was  no  such  a 
situation  as  that  which  arose  in  the  office  of  the  Quartermaster 
General  whereby  the  contracting  virtually  was  taken  over  by 
advisory  committees  and  the  responsible  contracting  officer 
made  subordinate  to  the  extra-departmental  advisers. 

Contract  Procedure  in  the  Army  Ordnance  Office 

On  the  question,'  as  to  what  part  the  supply  officers  taken 
from  civil  life  had  in  the  purchasing  and  price  fixing  for  the 
several  divisions  having  to  do  with  supplies,  it  appears  that 
the  assistants  made  the  first  negotiations  but  that  no  price 
was  finally  agreed  upon  without  the  approval  of  the  regular 
officer.  These  divisional  officers  headed  the  contracting  units 
for  ordnance  supplies,  just  as  similar  officers  in  the  other 
departments  or  corps  or  bureaus  of  the  War  Department 
operated  as  independent,  uncoordinated  units  of  purchase 
and  supply.  Hence  the  two  competed  in  the  same  market  for 
such  supplies  as  blankets,  harness,  saddles  and  halters.  But, 
as  a  rule,  the  great  bulk  of  the  supplies  of  the  Ordnance 
Department  were  noncommercial  in  character,  excepting,  of 
course,  raw  materials.  Among  the  purchasing  divisions  there 
was  as  yet  no  such  coordination  within  that  department  as 
came  later.  That  came  after  the  problem  of  contract  han- 
dling had  been  met  by  the  ordnance  bureaus  to  a  sufficient 
extent  to  get  production  well  under  way. 

Now  as  to  the  department's  external  relations  with  the 
manufacturers.     For  the  Ordnance  Department  coordination 


WAR   CONTRACT    OPERATIONS  lOI 

with  the  Industrial  systems  of  the  country  became  a  crying 
necessity  early  in  the  war.  Prior  to  19 14  there  were  only  six 
government  arsenals  and  two  private  works  which  could  make 
heavy  weapons.  So  long  as  it  had  a  practically  unlimited 
market  from  which  to  buy,  it  was  master  enough  of  the  situa- 
tion not  to  need  more  outside  help  than  the  two  or  three  pri- 
vate plants  afforded.  But  now  that  both  the  army  and  the 
navy  were  pressing  their  needs  upon  a  market  that  had 
become  entirely  inadequate  there  was  urgent  need  for  some 
medium  by  which  the  contracting  divisions  of  the  service 
might  be  guided  in  the  placement  of  contracts  w4th  the  assur- 
ance of  not  overburdening  some  of  the  manufacturing  plants 
and  leaving  others  undersupplied  with  orders.  For  this  serv- 
ice the  General  Munitions  Board  came  into  existence,  and 
began  to  function  in  cooperation  with  the  Ordnance  Office 
within  a  month  or  so  after  the  war  began. ^ 

This  particular  service  was  called  the  allocation  of  orders 
and  contracts.  It  served  to  keep  the  departments  and  their 
separate  contracting  divisions  from  competing  for  the  same 
industrial  plants.  ^  A  second  service  rendered  by  the  General 
Munitions  Board,  which  later  became  the  War  Industries 
Board,  was  that  of  initiating  unutilized  firms  and  the  manu- 
facturing capacity  of  kindred  industries.  This  was  effected 
in  two  ways — by  the  creation  of  new  industrial  concerns  or  the 
enlargement  of  existing  ones.  That  was  a  problem  of  distrib- 
uting the  load  over  the  actual  and  potential  manufacturing 
capacity  of  the  country.  Local  advisory  committees  rendered 
valued  assistance  in  this  capacity.  The  third  service  arose 
with  the  disappearance  of  the  competitive  system  of  awarding 
contracts.  With  competitive  bidding  a  thing  of  the  past,  how 
was  the  government  to  know  whether  it  was  getting  a  square 
deal  as  to  prices  agreed  upon?  With  the  trained  price  spe- 
cialists of  the  War  Industries  Board,  or  its  predecessor,  passing 

^  War  Expenditures  Hearings,  Gen.  Wm.  Crozier's  Testimony,  Ser.  I,  part  5, 
pp.  464,  474. 

^Hearings  on  Army  Appropriations  Bill  of  1919,  Vol.  I,  p.  47:  Testimony  of 
Col.  Jay  E.  Hoffer  on  ordnance  orders  allocation  to  prevent  competition  between 
Army  and  Navy  Ordnance  bureaus  for  forgings  at  beginning  of  the  war. 


102  GOVERNMENT   WAR   CONTRACTS 

upon  the  industrial  and  commercial  aspects  of  ordnance  con- 
tracts, the  Ordnance  authorities  felt  a  sense  of  safeguarding 
presence — a  precaution  and  an  effective  preventive  of  price 
boosting  which  had  outraged  the  common  sense  of  the  country 
earlier  In  the  war  era. 

The  actual  procedure  in  the  relations  of  the  War  Industries 
Board,  which  represented  the  extra-departmental  Council  of 
National  Defense,  to  the  Ordnance  Department  may  be 
shown  best  by  a  specific  instance  from  official  testimony. 
From  the  Hearings  of  the  House  Committee  on  War  Ex- 
penditures, the  following  Is  taken: 

The  Chairman:  Suppose  you  wanted  to  buy  a  certain  kind  of  shells  of  a  cer- 
tain calibre,  steel  products — was  that  all  handled  by  the  oflficers  of  your  depart- 
ment? 

General  Crozier:     Mostly. 

The  Chairman  :     What  part  of  it  did  anyone  else  do? 

General  Crozier:  When  the  officers  of  my  own  department  had  from  their 
own  knowledge,  or  with  the  help  of  suggestions  from  the  War  Industries  Board, 
entered  into  negotiations  with  certain  manufacturers  for  the  use  of  their  plants — 
and,  generally  speaking  for  the  enlargement  of  their  plants  which  was  usually  done 
at  government  expense — and  for  the  supply  of  shells,  we  will  say,  at  an  agreed 
price,  and  had  agreed  upon  specifications  which  we  had  theretofore  explained, 
and  time  of  delivery  and  rate  of  delivery,  all  of  which  was  done  before  the  order 
was  finally  given,  it  was  submitted  to  the  War  Industries  Board  for  them  to  clear 
it.  That  is  to  say,  for  them  to  approve  the  use  of  a  particular  manufacturing 
establishment  in  doing  such  work,  and  in  order  that  the  War  Industries  Board 
might  indicate  their  opinion  that  it  did  not  unduly  interfere  with  the  work  that 
that  manufacturing  establishment  had  for  some  other  department,  and  also  to 
approve  prices.  And  when  that  was  done  the  order  was  formally  given  and  the 
contract  was  entered  into  by  the  Ordnance  Department.^ 

Strategic  Importance  of  America's  Ordnance 

Problem 

The  placing  of  orders  and  contracts  for  ordnance  was  vitally 
affected  by  our  European  Alliance.  Late  In  191 7  the  division 
of  labor  in  the  prosecution  of  the  World  War  was  formally 
outlined  as  between  Europe  and  the  United  States,  in  the 
international  ordnance  agreement.  With  that  defined,  the 
strategic  importance  of  the  problem  only  gradually  dawned 
upon  the  national  consciousness.     At  first.  Indeed,  it  seemed 

'  War  Expenditures  Hearings,  Ser.  I,  part  5,  pp.  466-467, 


WAR   CONTRACT    OPERATIONS  IO3 

as  if  our  Allies  had  really  lightened  our  burden.  But  it  soon 
became  clear  that  our  problem,  stripped  of  all  that  disguised 
its  naked  realities,  was  infinitely  more  than  a  mere  American 
problem.  As  the  elements  of  illusion  lifted,  its  expansion 
disclosed  a  scope  even  greater  than  interallied  limits — it  stood 
out  as  a  world  problem  of  the  widest  possible  extent  and  com- 
plexity. In  its  essential  character  it  consisted  in  the  assump- 
tion of  the  obligation  to  pour  into  the  World  War  situation 
three  streams  of  resources — millions  of  tons  of  subsistence, 
millions  of  units  of  man  power  and  billions  of  dollars  worth  of 
supplies  and  munitions.  From  this  time  forward  the  key 
to  the  great  military  drama  as  it  was  developed  back  of  the 
lines  of  battle  centered  more  and  more  in  the  industrial,  the 
commercial  and  the  financial  potentialities  and  achievements 
of  the  United  States. 

America's  armament  program  on  this  scale  of  production 
of  munitions  was  handicapped  by  an  extremely  limited 
knowledge  of  how  to  work  it  out.  There  was  also  the  diffi- 
culty of  utilizing  foreign  experience  as  yet  largely  unorganized. 
The  problem  of  contract  engagements  was  still  further  com- 
plicated by  the  rapidly  expanding  ratio  of  requirement  which 
each  increase  in  the  strength  of  the  army  entailed,  from  a 
quota  first  of  500,000  men  and  up  to  5,000,000;  and,  finally,  by 
the  trend  toward  the  w^idening  uses  and  larger  emphasis  on 
newly  developing  mechanical  devices.  Along  with  these 
came  the  gradual  awakening  to  the  fact  of  the  rapid  exhaustion 
of  the  world's  resources  in  both  raw  materials  and  skilled 
labor.  "The  cumulative  effect  of  these  factors,"  wrote  an 
official  in  the  inner  councils  of  the  Ordnance  Department, 
"produced  a  task  of  such  inherent  difficulty  and  such  im- 
measurable vastness  as  to  transcend  the  most  imaginative 
conception  of  the  human  mind."  The  estimated  cost  of  the 
ordnance  required  to  equip  our  first  5,000,000  men  was 
between  $12,000,000,000  and  $13,000,000,000. 

The  main  burden  of  this  two-year  program  rested  upon  the 
shoulders  of  American  industry.  Several  government  arse- 
nals and  as  many  private  concerns  comprised  about  all  that 


104  GOVERNMENT   WAR   CONTRACTS 

could  be  regarded  as  specially  equipped  for  ordnance  manu- 
facture, as  late  as  April,  191 7.  How  rapid  was  the  trans- 
formation in  the  mechanical  equipment  of  the  country  may 
be  inferred  from  the  fact  that  when  the  armistice  occurred 
there  were  nearly  8,000  manufacturing  plants,  employing 
over  4,000,000  persons,  engaged  in  the  production  of  ordnance 
in  the  United  States.  In  addition  to  that,  it  was  estimated 
by  Ernest  T.  Trigg,  speaking  for  the  War  Industries  Board, 
that  two  weeks  before  the  armistice  was  signed  there  were 
urgent  appeals  for  approximately  i  ,200,000  more  war  workers 
than  could  be  supplied  without  placing  further  embargoes  on 
nonwar  industries.  The  pressure  for  production  was  out- 
running the  industrial  man  power. 

Ordnance  Office  Reorganization  as  Affecting 

Contracts 

There  was  much  criticism  current  as  to  Ordnance  Ofhce 
methods  and  results  from  the  very  beginning  of  the  war. 
Congress  felt  that  it  had  not  been  prompt  enough  in  providing 
machine  guns.^  The  increase  of  new  official  personnel  by  four 
hundredfold  by  the  end  of  the  year  191 7  was  one  source  of 
confusion.  This  was  inevitable,  especially  as  the  regular 
army  officers  who  could  have  trained  the  new  personnel  were 
drawn  away  from  Washington  into  the  factory,  the  camp 
and  the  field  of  operations  in  France.  This  lack  of  a  training 
remnant  soon  told  on  the  morale  of  the  whole  force.  It 
found  expression  in  a  degree  of  confusion  that  might  well 
have  made  less  devoted  officers  sick  at  heart.  Yet  it  was 
exactly  what  was  to  have  been  expected  from  years  of  the 
policy  of  repression,  of  warnings  and  appeals  to  get  ready  for 
emergencies.  In  nothing  did  this  attitude  of  high  official 
ease  in  Zion  appear  to  come  to  judgment  more  evidently  than 
in  the  handling  of  contracts. 

The  Ordnance  Department  itself,  as  organized  on  the  peace 
time  basis,  could  not  at  first  be  expected  to  prove  equal  to 

'  Investigation  of  the  War  Department,  Part  I,  p.  179.     Statements  of  Chief 
of  Ordnance,  December  12-31,  1917  (confidential). 


WAR    CONTRACT    OPERATIONS  IO5 

the  overwhelming  amount  of  war  time  work  in  the  custody 
of  the  new  personnel.  Many  new  varieties  of  talent  from  pro- 
fessional, technical  and  business  circles  were  added;  but  that 
very  factor  rather  intensified  than  helped  to  overcome  the 
lack  of  coordination  among  the  several  contracting  units. 
Thus  both  internal  conditions  and  external  relations  with  the 
business  organization  disclosed  some  of  the  more  serious  handi- 
caps under  which  the  ordnance  office  was  endeavoring  to 
transact  a  volume  of  work  too  big  for  it  in  the  condition  in 
which  the  war  had  caught  it.  Yet,  in  spite  of  all  the  criticism, 
this  office  had  by  the  end  of  191 7  awarded  contracts  amount- 
ing to  $1,750,000,000  since  the  beginning  of  hostilities  on 
April  6,  Senate  investigations  (Committee  on  Military 
Affairs)  had  their  effect  in  prompting  the  Secretary  of  War 
to  approve  a  plan  of  reorganization,  whereby  the  Ordnance 
Office  work  was  placed  on  a  functional  basis.  This  plan 
separated  the  technical  duties  from  the  business  functions 
and  consolidated  the  operations  into  nine  divisions,  princi- 
pally of  procurement  (placing  orders  and  contracts),  produc- 
tion, (industrial),  inspection  and  supply.  By  this  arrange- 
ment the  work  of  designing  of  all  kinds,  the  work  of  contract 
letting  and  ordering,  the  work  of  keeping  track  of  the  prog- 
ress of  manufacturing  and  delivery  of  each  one  of  the  thou- 
sands of  contracts  and  the  work  of  inspecting  products  and 
purchases— these  were  differentiated  into  their  respective 
divisions.  The  Chief  of  Ordnance  was  given  an  extensive 
staff  of  administrative  and  scientific  assistants,  more  in  keep- 
ing with  the  enormously  expanded  program  of  ordnance 
equipment  to  which  the  past  couple  of  years  of  warfare  had 
added  thousands  of  novel  and  essential  items.  At  the  same 
time  the  more  centralized  control  of  munitions  production 
was  put  under  the  supervision  of  a  Director  of  Munitions, 
serving  as  Assistant  Secretary  of  War.  In  the  supply  field 
the  Director  of  Purchase,  Storage  and  Traffic  had  effected  a 
similar  centralization;  so  that  by  the  beginning  of  191 8  the 
two  great  contracting  divisions  of  the  War  Department  were 
reorganized  and  entering  on  the  large  scale  program  planned 


I06  GOVERNMENT   WAR   CONTRACTS 

by  the  military  authorities  in  cooperation   with  the  Allied 
leaders  of  Europe.^ 

The  International  Ordnance  Agreement 

Our  war  contracting  program  by  the  time  the  Interallied 
policy  of  united  action  had  been  worked  out  by  Interallied 
conferences,  involved  two  further  developments  in  the  scope 
of  supply  and  materiel  production.  One  of  these  was  that 
outlined  in  the  international  ordnance  agreement  based  on  a 
searching  survey  of  the  military  situation.  The  essential 
features  of  this  arrangement  were: 

That  Great  Britain  and  France  had  developed  their  scale  of  production  of  heavy 
artillery  to  such  an  extent  as  to  be  able  to  supply  all  American  divisions  as  they 
arrived  in  France  during  the  year  191 8. 

That  the  British  and  French  ammunition  supply  and  reserves  were  sufficient 
to  meet  the  needs  of  the  American  army  up  to  June,  1918,  if  the  existing  6-inch 
shell  plants  in  the  United  States  and  Canada  maintained  full  activity,  and  if  6- 
inch  howitzer  carriages  were  manufactured  here. 

That  the  most  immediate  need  of  France  was,  and  to  a  lesser  extent  Great 
Britain,  a  large  supply  of  propellants  and  high  explosives  of  specified  varieties, 
including  6-inch,  8-inch  and  9.2-inch  shells,  and  that  large  additional  manufactur- 
ing capacity  for  these  shells  be  at  once  laid  down  in  the  United  States. 

This  program  had  a  profound  effect  on  our  entire  war 
contract  regime.  It  brought  out  clearly  the  two  concurrent 
efforts  of  the  war,  that  the  United  States  had  to  maintain  the 
fighting  forces  of  the  Allied  Powers  by  shipping  food,  making 
and  delivering  in  Europe  war  materiel  during  the  year  191 8, 
and  at  the  same  time  tranship  our  man  power  and  build  up 
our  war  industries  to  equip  them  with  munitions  and  supplies 
in  readiness  for  the  final  drive  on  the  Central  Powers  in  the 
year  1919.  The  year  191 8  was  to  be  almost  incidental — a 
period  of  gathering  strength  for  a  supreme  effort  in  the  year 
or  two  beyond.  One  prominent  effect  of  the  plan  of  prepara- 
tion was  to  bring  the  production  of  small  arms  to  the  front  as 
a  feature  of  our  munitions  contracting,  because  of  the  early 
discovery  that  "America  can  organize,  train  and  transport 
troops  of  a  superior  sort  at  a  rate  which  leaves  far  behind 
any  program  for  the  manufacture  of  munitions.  "^ 

1  Report  of  Secretary  of  War,  1918,  pp.  55-60. 

^America's  Munitions,  by  Benedict  Crowell,  Director  of  Munitions,  p.  17. 
Washington,    1919. 


CHAPTER   VII 

Analysis  of  Standard  Ordnance  Contracts 

One  of  the  most  Interesting  features  of  war  contract  forms 
is  the  evolution  of  successive  standards  and  clauses  as  the 
business  developed  from  one  form  to  another.  When  the 
armistice  came  there  were  executed  in  the  Procurement  Divi- 
sion of  the  Ordnance  Office,  which  had  ordnance  contracting 
in  hand,  not  less  than  20,000  orders  and  contracts.  The  so- 
called  informal  contracts,  for  which  supplementary  legisla- 
tion was  at  once  sought  and  later  obtained,  fell  largely  under 
this  class  of  procurement  orders,  for  which  the  Ordnance 
Office  had  entered  into  agreements  without  conforming  fully 
to  the  lawful  standards  of  army  and  navy  contracts.  The 
form  used  in  the  lawfully  drawn  contracts  and  orders  was 
known  as  Ordnance  Office,  Form  No.  8,  the  twenty- four 
articles  of  which  represent  the  main  part  of  the  war's  experi- 
ence in  the  perfection  of  contract  provisions.  These  were 
generally,  although  by  no  means  exclusively,  of  the  cost-plus 
type. 

Complexity  of  Contracts  Necessitates  Analysis 

Whoever  takes  pains  to  make  analysis  of  a  series  of  con- 
tract forms,  such  as  these  from  No.  i  to  No.  8,  inclusive,  can 
not  but  be  impressed  with  the  tendency  toward  increasing 
complexity.  It  is  this  tendency  toward  complexity  that 
makes  analysis  necessary  in  the  exposition  of  the  contractual 
relations.  This  is  evident  in  the  increased  number  of  ques- 
tions covered,  in  the  enlargement  of  clauses  into  paragraphs 
and  in  the  disposition  to  expand  definitions  and  terms  so  as 
to  cover  all  actual  and  possible  angles  and  elements  of  doubt 
that  may  have  arisen  as  a  matter  of  experience  or  of  precau- 
tion. The  purport  of  these  contract  forms  becomes  clear  if 
one  keeps  in  mind  that  the  cost  basis  is  fundamental  in  defin- 

107 


I08  GOVERNMENT   WAR   CONTRACTS 

ing  the  duties  and  specifying  conditions.     Time  is  the  key- 
stone to  the  cost-plus  agreement. 

Outline  of  Principal  Features  of  Contract 

A.  Article  contracted  for,  with  description,  and  reference  to 

drawings  and  specifications,  quantity  and  quality,  etc. 

B.  Delivery,  including  quantities  and  dates. 

(i)   Instructions  for  packing,  boxing,  storing  and  ship- 
ping. 

(2)  Inspection,  to  be  prompt  upon  notice  by  contractor. 

(3)  Progress  to  be  anticipated  and  delays  penalized. 

C.  Price,  Cost  and  Price  adjustment. 

(i)  Fixed  price,  or  fixed  or  per  cent  profit. 

(2)  Adjustment    as    to    costs    of    materials,    labor    and 

changes  in  specifications. 

(3)  Liquidated  damages  deducted  for  delays  in  delivery. 

(4)  Purchase  price  based  on  estimated  cost  to  be  ad- 

justed to  actual  cost  of  materials,  labor,  etc. 

D.  Special  Provisions. 

(i)   Right  to  increase  order  within  given  period,  at  the 
same  price. 

(2)  Right  to  terminate  order  if  war  ends  or  Ordnance 

Chief  deems  that  public  interest  so  requires. 

(3)  Settlement  of  disputes,  employment  conditions,  etc. 

(4)  Property  rights  reserved,  patents,  subcontract  assign- 

able to  the  United  States  only. 

These  are  the  skeleton  features  of  the  most  generally  used 
war  contract  forms  by  the  Ordnance  Office  of  the  army. 
Each  of  these  has  been  the  subject  of  negotiation  at  some  time 
or  other,  on  one  or  more  articles  of  purchase  and  contract. 
In  the  standardized  forms  of  this  series  the  itemized  articles 
are  as  follows: 

Article  I.  In  this  form  the  first  article  describes  the  com- 
modity to  be  furnished,  the  prices  and  the  time  and  quantity 
involved  in  deliveries.  The  nation  is  at  war.  Hence  the 
preamble,  which  gives  the  reason  for  agreeing  upon  prices  and 
delivery  dates,  recites  that  "whereas  a  state  of  war  exists 


WAR   CONTRACT   OPERATIONS  IO9 

between  the  United  States  and  certain  foreign  countries  con- 
stituting a  national  emergency,"  and  that  "the  usual  require- 
ments of  advertisement  for  proposals  are  dispensed  with," 
therefore  contracting  agreement  is  not  any  longer  on  the 
competitive  basis,  but  on  mutual  agreement  that  the  "work- 
manship and  quality  of  the  articles  shall,  in  the  absence  of 
other  provisions,  be  the  best  of  their  respective  classes  and 
free  from  latent  defects."  Here  is  a  distinct  concession  to 
accept  goods  by  the  standards  of  commercial  work  rather  than 
by  technical  inspection  emphasizing  incidentals. 

Article  II.  Specifications. — The  contract  and  the  speci- 
fications are  related  as  genus  and  species.  So  that  if  there 
be  any  conflict  between  the  two  the  contract  governs.  If 
the  specifications  be  changed,  as  the  government  reserves  the 
right  to  do,  the  contract  price  is  changed  accordingly;  the 
price  is  advanced  if  the  change  involves  added  expense  and 
reduced  if  it  entails  less  expense.  The  procedure  for  adjust- 
ment of  claims  is  provided  for" in  Section  XVII,  under  "ad- 
justment of  claims  and  disputes." 

Methods  of  Controlling  Materials  and  Delivery 

Article  III.  Component  Parts  and  Materials  Furnished  hy 
the  United  States. — So  eager  was  the  government  to  get.  Its 
munitions  made  that  it  practically  agreed  to  deliver  all  "the 
component  parts  and  materials"  at  the  premises  of  its  manu- 
facturing contractors  In  scheduled  quantities  "at  such  times 
and  in  such  quantities  as  In  the  opinion  of  the  contracting 
officer  will  enable  the  contractor  to  perform  this  contract  in 
accordance  with  its  terms."  In  case  of  failure  to  supply 
these  component  materials  the  United  States  shall  reimburse 
the  'contractor  for  any  outlay  made  on  that  account.  In 
many  contracts,  such  as  copper  furnished  to  the  munition 
makers  or  leather  to  the  equipment  makers,  the  government 
had  control  of  the  surplus  supply  In  the  country.  Such  was 
also  the  case  with  wool.  Component  materials  had  to  come 
from  the  governrnent,  unless  additional  supplies  came  to 
light. 


no  GOVERNMENT   WAR   CONTRACTS 

A rtide  IV.  Manufacturers  were  given  latitude  on  quantity 
deliveries  by  the  provision  that  a  contract  was  to  be  consid- 
ered as  completed  for  purposes  of  settlement,  if  2  per  cent 
more  or  less  than  the  exact  amount  called  for  had  been  deliv- 
ered and  accepted.  The  rate  of  compensation  was  pro- 
portioned to  the  quantity  delivered. 

Article  V.  Packing  and  Delivery. — Ordnance  articles  re- 
quire careful  packing  as  a  rule.  The  contractor  is  generally 
required  to  provide  packing  boxes  and  markings  for  domestic 
shipment  at  no  extra  expense.  Shipping  to  any  part  of  the 
United  States  is  to  be  at  the  government's  expense.  Some- 
times packing,  if  specially  expensive,  forms  a  separate  con- 
tract, and  often  a  subcontract. 

Payments,   Priorities  and   Inspection 

Article  VI.  Payment. — Payment  as  delivered  is  dependent 
on  inspection  as  a  rule.  Accepted  deliveries  are  paid  through 
the  District  Ordnance  Ofifice,  but  funds  can  not  be  made  avail- 
able until  the  contract  has  been  executed  by  the  contractor 
and  returned  to  the  Ordnance  Department.  In  the  legal 
sense,  delivery  of  contract  completes  the  agreement. 

Article  VII.  Time. — This  article  is  important  enough 
to  quote  in  full: 

Time. — Time  is  the  essence  of  this  contract.  The  contractor  shall  give  the 
performance  hereof  pieference  and  priority  over  any  other  work  except  work 
heretofore  given  preference  or  priority  by  the  United  States. 

Next  in  importance  to  the  speedy  execution  of  contracts  is 
the  subject  of  inspection  of  products.  That  has  always  been 
one  of  the  most  critical  stages  in  contractual  relations  with 
the  government.  Its  object  is  to  insure  quality  of  product, 
which  is  a  prime  requisite  of  dependable  war  munitions.  In 
such  matters  there  can  be  no  taking  of  chances ;  consequently 
every  reasonable  doubt  must  be  construed  against  an  article 
which  discloses  any  actual  or  potential  defects.  Such  is 
the  theory,  at  least;  but  the  practice  has  at  times  of  emer- 
gency to  be  modified  by  the  exigencies  of  the  army,  especially 
when  in  need  of  supplies  and  munitions. 


WAR   CONTRACT   OPERATIONS  III 

Article  VIII,  on  inspection,  contains  the  following  require- 
ment: 

The  articles  or  work  are  subject  to  observation,  inspection,  and  tests  by  the 
United  States  at  any  and  all  times  during  manufacture  or  performance  in  order 
to  determine  their  compliance  with  the  requirements  of  this  contract,  and  are 
subject  to  acceptance  or  rejection  by  the  United  States  at  the  place  of  delivery 
hereinbefore  specified.  For  this  purpose  the  United  States  may  maintain  an 
inspector  or  inspectors  at  the  plants  or  places  where  and  during  the  time  this 
contract  is  being  performed.  Such  inspectors  may  reject  any  and  all  articles  or 
work,  or  components  thereof,  and  materials  found  not  to  be  in  compliance  with 
the  requirements  of  this  contract. 

The  entire  process  of  manufacture  is  thus  at  all  times  sub- 
ject to  the  inspection  and  supervision  of  the  Chief  of  Ordnance 
and  his  official  representatives.  This  includes  all  materials, 
machinery,  equipment  and  plant  used  in  performance  of  the 
contract.  He  may  require  of  the  contractor  to  replace  all 
rejected  materials  or  parts  not  furnished  by  the  United  States, 
and  may  withhold  payment  until  compliance.  Upon  notice 
of  completion,  final  inspection  shall  be  made  promptly. 

Inspection  Standards  and  Emergency  Production 

On  the  subject  of  inspection  standards  there  have  always 
been  two  more  or  less  conflicting  attitudes — the  commercial 
and  the  military.  The  experience  of  the  small  arms  manufac- 
turers with  the  foreign  governments  is  recalled,  as  having  come 
very  near  defeating  the  hope  of  American  helpfulness  to  the 
Allied  cause  prior  to  our  entrance  into  the  war.  That  was 
a  clear  case  of  failure  to  appreciate  each  other's  point  of  view 
on  the  question  of  essential  quality  in  the  effort  to  reach 
quantity  production  in  the  shortest  practicable  time.  In  due 
time  the  official  criteria  had  to  yield  to  the  commercial  stand- 
ard of  effective  tests,  in  order  that  the  larger  object  might  not 
fail  of  achievement. 

It  was  the  same,  both  in  the  problem  of  quantity  produc- 
tion and  in  its  solution,  when  we  came  to  manufacture  for  our 
own  ordnance  needs.  If  the  government  wanted  articles  of 
warfare  in  exceptionally  short  time,  it  had  to  abandon  empha- 
sis on  incidentals,  put  less  stress  on  appearances  and  accept 
products  on   the  one  single  basis  of  service.     Would  they 


112  GOVERNMENT   WAR    CONTRACTS 

function  effectively,  within  a  reasonably  allowable  margin 
of  certainty,  under  the  emergent  conditions  for  which  they 
were  designed?  As  standardization  was  developed,  as  talent 
rose  to  the  higher  level  of  skill,  these  two  attitudes  came  to 
focus  in  the  record  output  in  such  articles  as  service  arms  and 
ammunition.  Between  April  6,  191 7,  and  November  30, 
1 91 8,  seven  ammunition  industries  made  the  enviable  record 
of  producing  over  2,600,000,000  rounds  of  ammunition.^  In 
commenting  on  this  result  in  its  relation  to  inspection  stand- 
ards, the  Director  of  Munitions,  War  Department,  disclosed 
just  such  a  concession  in  the  official  attitude  to  the  require- 
ments of  the  war.  Contracts  by  numerous  American 
concerns  had  educated  thousands  of  mechanics  and  shop  ex- 
ecutives to  the  production  of  ammunition  for  foreign  govern- 
ments, just  as  in  the  making  of  small  arms.  It  was  upon 
these  private  concerns,  rather  than  on  the  government  arsenals, 
that  reliance  was  now  placed.  Their  record  is  in  no  wise 
discounted  by  the  official  apology: 

This  production  record  to  some  extent  was  made  possible  by  a  leniency  on  the 
part  of  the  Ordnance  Department  which  we  had  not  displayed  before  the  war. 
When  we  could  take  plenty  of  time  in  ammunition  manufacture  our  specifications 
for  cartridges  were  extremely  rigid.  It  soon  became  apparent  that  if  we  adhered 
to  our  earlier  specifications  we  would  limit  the  output  of  cartridges.  It  was 
found  in  a  joint  meeting  of  ordnance  officers  and  ammunition  manufacturers  that 
certain  increased  tolerances  could  be  permitted  in  our  specifications  without  affect- 
ting  the  serviceability  of  the  ammunition.  Consequently  new  specifications  for 
our  war  ammunition  were  drawn,  enabling  the  plants  to  get  into  quantity  produc- 
tion much  more  quickly  than  would  have  been  possible  if  we  had  not  relaxed  our 
prewar  attitude.^ 

In  peace  it  was  the  practice  to  meet  inspection  needs  in 
private  plants  by  sending  inspectors  out  from  the  nearest 
arsenal,  under  some  official  command.  War  time  work  called 
into  being  a  separate  inspecting  division  in  the  Ordnance 
Corps.  This  meant  decentralization.  At  first  only  artillery 
ammunition  and  trench  warfare  material  were  given  divisional 
inspection,  the  larger  plants,  where  rifles,  machine  guns  and 
others  were  made,  being  inspected  by  separate  organizations. 

^America's  Munitions,  1917-1918,  p.  193. 
'^Ibid.,  pp.  193-194. 


WAR    CONTRACT    OPERATIONS  II3 

The  work  of  contractors  and  the  government's  interest  were 
both  served  by  the  volunteering  of  hundreds  of  civilian  experts 
for  this  service.  Of  these  the  Chief  of  Ordnance  wrote  in  his 
annual  report  for  191 8: 

Some  idea  of  the  magnitude  and  importance  of  inspection  work  is  imparted  by 
the  fact  that  even  when  limited  to  the  inspection  of  artillery  ammunition  and 
trench  warfare  material  manufactured  at  private  plants,  the  inspection  division 
will  require  the  services  of  at  least  200  commissioned  officers  and  about  2,000  civil- 
ian employes.  Only  two  experienced  officers  can  be  spared  to  recruit,  organize 
and  train  this  personnel.  That  satisfactory  progress  is  being  made  is  due,  in  great 
measure,  'to  the  patriotism  which  has  prompted  many  prominent  and  successful 
manufacturers  and  mechanical  engineers  to  surrender  their  business  positions  and 
serve  the  government  as  officers  in  the  Ordnance  Reserve  Corps  :i 

Cancelation   of   Ordnance   Contracts 

Cancelation  articles  are  a  standard  feature  of  practically 
all  war  contracts.  This  is  one  way  which  the  government 
takes  to  protect  itself  against  the  contingency  of  the  con- 
tractor's inability  to  complete  his  agreement.  In  war  time, 
when  speed  of  performance  is  primary,  the  failure  to  make 
good  in  the  schedule  of  deliveries  in  the  absence  of  good  rea- 
sons affords  the  occasion  for  canceling  the  contract  and  put- 
ting the  job  into  the  hands  of  another,  in  case  the  government 
should  not  want  to  take  up  the  task  for  itself.  After  the 
middle  of  191 8,  however,  the  insertion  of  cancelation  clauses 
terminating  the  contract  in  case  of  the  end  of  the  war  began 
to  appear  in  the  formal  awards.  Even  earlier  than  that  was 
the  edition  of  Form  600 — D,  War  Department,  Chief  of 
Ordnance  Office,  dated  May  13,  191 8  (War— Ord.  O.  O.  PI. 
Form  No.  7).  In  that  the  cancelation  provision  ran  as 
follows : 

This  contract  being  necessitated  by  a  state  of  war  now  existing,  it  is  desirable 
and  expedient  that  provision  be  made  for  its  cancelation  upon  fair  and  equitable 
terms  in  the  event  of  the  termination  or  limitation  of  the  war,  or  if  in  anticipation 
thereof  or  because  of  changes  in  the  methods  of  warfare  the  Chief  of  Ordnance 
shall  be  of  the  opinion  that  the  completion  of  this  contract  shall  become  unneces- 
sary. It  is  therefore  provided  that  at  any  time,  and  from  time  to  time,  during  the 
currency  of  this  contract,  the  Chief  of  Ordnance  may  for  any  of  the  causes  above 
stated  notify  the  contractor  that  any  part  or  parts  of  the  articles  then  remaining 
undelivered  shall  not  be  manufactured  or  delivered. 

^  Report  of  the  Chief  of  Ordnance,  1918,  p.  20,  on  "Inspection  Division." 


114  GOVERNMENT   WAR    CONTRACTS 

The  foregoing  part  of  the  cancelation  article  (Article  XIV. 
Termination)  served  to  protect  the  interests  of  the  govern- 
ment in  the  premises,  by  practically  suspending  operations, 
putting  the  entire  productive  program  in  the  hands  of  the 
Chief  of  Ordnance.  For  the  protection  of  the  contractor,  on 
the  other  hand,  specific  provisions  were  made  to  secure  him 
against  possible  losses  from  obligations  extending  into  the 
future.  It  was  stipulated  that  in  the  event  of  such  complete 
or  partial  termination  the  United  States  shall  inspect  all  com- 
pleted articles  then  on  hand  and  completed  within  thirty  days 
after  notice,  and  shall  pay  the  contractor  the  price  fixed  for 
all  articles  completed  and  accepted.  The  government  further 
agrees  to  cover  the  cost  of  materials  and  component  parts  pur- 
chased by  the  contractor  on  account  of  this  contract,  also  all 
costs  necessarily  incurred  and  remaining  unpaid,  and  "shall 
also  protect  the  contractor  on  all  obligations  incurred  neces- 
sarily and  solely  for  the  performance  of  this  contract  of  which 
the  contractor  can  not  be  otherwise  relieved.  To  the  above 
may  be  added  such  sums  as  the  Chief  of  Ordnance  may  deem 
necessary  to  fairly  and  justly  compensate  the  contractor  for 
work,  labor  and  services  rendered  under  this  contract." 

Here  was  foreshadowed  the  main  outlines  of  the  contract 
cancelation  policy,  six  months  before  it  actually  came  into 
effect  by  the  armistice.  In  the  next  edition  of  the  ordnance 
contract,  dated  October  i,  1918,  the  scope  of  the  article  (XII) 
on  cancelation  and  termination  before  completion  had  a  much 
wider  application;  but  the  mention  of  the  contingency  of  the 
end  of  the  war  had  disappeared  entirely  from  the  considera- 
tions. Evidently  it  was  not  deemed  prudent  even  to  enter- 
tain that  specific  condition,  because  of  its  possibly  deterrent 
effect  on  the  rate  of  delivery  of  munitions.  This  later  form 
(Form  8),  on  the  other  hand,  gave  two  specific  conditions  on 
which  termination  might  become  efi^ective,  and  defined  the 
procedure  for  settlement  in  each  of  these  cases: 

1.  Cancelation  for  contractor's  default  in  deliveries. 

2.  Termination  in  public  interest,  at  the  option  of  the  Chief 
of  Ordnance. 


WAR   CONTRACT    OPERATIONS  II5 

The  latter  included  no  doubt  the  contingency  of  the  war's 
end,  without  really  making  mention  of  it  as  such.  It  must 
also  have  covered  munitions  which  new  inventions  rendered 
useless.  In  either  of  these  cases  of  termination  it  was  pro- 
vided, first,  that  all  subcontracts  should  be  assigned  to  the 
United  States  at  the  request  of  the  Chief  of  Ordnance;  and 
secondly,  that  possession  should  be  given  the  United  States 
so  that  the  government  may  proceed  to  complete  the  manu- 
facture, make  additional  articles  or  perform  other  work  in 
pursuance  of  the  original  project. 

One  other  cause  for  cancelation  of  contract  is  included  in 
the  failure  of  the  contractor  to  afford  adequate  plant  protec- 
tion (Article  XIII)  against  acts  of  alien  enemies,  or  from  fail- 
ure to  dismiss  or  keep  out  undesirables  upon  request  of  the 
Chief  of  Ordnance.  For  such  plant  protection  extra  allow- 
ances are  to  be  made  the  contractor.  In  many  cases  con- 
tractors organized  vigilance  committees  to  guard  against 
alien  enemies. 

Other  Features  of  Procurement  Contracts 

One  of  the  main  difficulties  in  dealing  with  contractors  is  to 
keep  them  from  involving  the  government  by  means  of  sub- 
contracting, by  creating  encumbrances  (Articles  XV  and  XVI) 
and  patent  infringements  (Article  XVIII).  In  order  to  keep 
the  contractor  from  making  such  entanglements  and  yet  en- 
able him  to  avail  himself  of  speedier  ways  of  executing  his 
contract,  all  subcontracts  must  first  have  the  approval  of  the 
government's  contracting  officer,  all  liens  or  other  encum- 
brances must  have  bonds  or  security  for  their  execution  and 
release,  in  default  of  which  the  contracting  officer  may  deduct 
any  claims  out  of  payments  due  the  contractor.  The  con- 
tractor covenants  against  paying  any  contingent  fees  to  any 
third  person  in  obtaining  his  contract,  and  agrees  to  protect 
the  United  States  from  liability  by  use  of  any  patented  or 
unpatented  invention,  process  or  suggestion  (Articles  XVIII, 
XXIII). 


CHAPTER   VIII 

Control  of  Costs  in  Ordnance  Contracts 

It  has  quite  generally  been  assumed  that  in  contracts  in 
which  the  government  pays  the  costs  the  contractor's  cost 
statements  were  about  the  only  basis  on  which  the  supervisory 
authorities  had  to  go  in  protecting  the  public  interest.  That 
was  not,  however,  the  case;  in  fact,  quite  the  contrary  prac- 
tice prevailed.  The  government,  in  much  of  its  ordnance 
contracting,  organized  and  operated  a  cost  controlling  system 
which  would  as  a  rule  have  done  credit  to  any  privately  man- 
aged establishment.  In  some  cases  the  contractor  may  have 
been  left  to  make  up  his  own  schedule  of  expenses  incurred. 
But  it  was  by  no  means  the  rule.  On  the  contrary,  it  was 
the  notable  exception,  taking  the  war  time  practice  of  cost 
inspection  as  a  whole.  ^ 

Definition  and  Principles  of  Contractual  Costs 

One  signal  proof  of  the  early  purpose  to  keep  mastery  of 
the  expenses  of  contract  work  is  found  in  the  preparation  of 
standard  rules  and  principles  for  the  guidance  of  contractors 
in  the  settlement  and  payment  of  accounts.  This  was  to  get 
a  common  ground  of  definition  and  classification  of  items  of 
expense.  On  that  basis  the  two  parties  to  the  ordnance  con- 
tracts kept  two  concurrent  sets  of  cost  accounting.  The 
contractor  had  his  own  bookkeeping  outfit,  and  the  govern- 
ment had  on  the  same  premises,  on  the  same  project,  its  own 
cost  accounting  unit.  The  latter  reported  regularly  either  to 
the  district  ordnance  board  or  to  the  central  control  at  Wash- 
ington, or  to  both.  For  each  project  there  was  a  schedule  of 
progress  of  work,  making  each  one  of  these  awards  compar- 
able with  each  and  every  other  one  of  a  similar  character. 
As  these  returns  took  form  they  served  as  indexes  of  the  pro- 

^  Hearings  on  War  Expenditures,  Ser.  I,  part  5,  p.  502. 

116 


WAR   CONTRACT   OPERATIONS  II7 

portion  of  pay  falling  due.  But  they  especially  provided 
against  disputes  as  to  what  was  and  what  was  not  to  be  in- 
cluded in  cost  itemizing.  It  also  laid  the  basis  for  a  prompter 
settlement  in  case  of  the  termination  of  contract.  In  what  is 
known  as  Ordnance  Ofifice  Form  No.  8,  the  express  provision 
is  Inserted,  that  "any  determination  of  costs  in  the  event  of 
termination  (of  contract)  shall  be  In  accordance  with  the 
pamphlet  entitled  Definition  of  Costs  Pertaining  to  Contracts, 
issued  by  the  office  of  the  Chief  of  Ordnance,  War  Depart- 
ment, dated  June  27,  191 7,  and  made  a  part  of  the  contracts." 

This  particular  "Definition  of  Costs"  was  elaborated  as  a 
joint  product  of  cost  accounting  talent,  including  some  of  the 
most  eminent  representatives  of  the  profession.  In  cooperation 
with  the  Ordnance  Office  of  the  War  Department.  It  came 
into  general  use  in  cost-plus  contracting  within  the  first  few 
months  ofter  the  advent  of  war.  Under  the  competitive 
methods  of  peace  time  awards  there  was  no  particular  need 
of  the  government's  concerning  itself  about  the  costs ;  it  had 
to  put  its  efforts  on  inspection  and  superA'IsIon  so  as  to  insure 
quality  of  results.  But  when  the  conditions  had  changed  so 
as  to  make  the  government  assume  costs,  it  became  necessary 
to  add  an  elaborate  statement  of  what  costs  pertaining  to 
contracts  made  on  this  basis  comprised.  This  was  done  in  a 
statement  first  of  general  conditions,  and  secondly  of  the  ele- 
ments of  cost,  as  outlined  in  this  "  Definition  of  Costs,  "  Form 
2941. 

In  the  adjustment  of  the  government's  cost  control  to  con- 
tracting practice  the  general  conditions  were  fully  taken 
into  account.   These  may  be  summarized  as  follows: 

1.  To  state  the  general  principles  involved  in  accounting 
for  the  cost  of  the  articles  contracted  for  with  the  United 
States  and  to  furnish  suggestions  for  the  guidance  of  the  con- 
tractor in  accounting  matters  relating  to  such  contracts. 

2.  To  accept  as  adequate  for  the  purposes  of  the  govern- 
ment the  form  or  forms  of  accounting  when  the  contractor 
has  established  accounts,  books  and  records  that  conform  to 
good    accounting   practice   and    can    furnish   therefrom    the 


Il8  GOVERNMENT   WAR    CONTRACTS 

necessary  data  required  to  compute  the  cost  of  manufacturing 
as  defined  therein. 

3,  That,  in  so  far  as  it  is  practicable  and  possible  to  do  so, 
it  was  desired  of  the  contractor  that  he  shall  "maintain  sep- 
arate from  all  other  records  pertaining  to  his  business,  the 
records  and  accounts  pertaining  to  contracts  with  the  United 
States."  This  meant  a  separate  ledger,  a  separate  bank  ac- 
count, also  separate  payrolls,  store  records,  vouchers,  sum- 
maries, bank  checks,  for  the  convenience  of  both  parties. 

4.  On  forms  to  be  supplied  by  the  contracting  officer  of  the 
government,  the  contractor  was  to  supply  such  details  and 
statistics  as  to  the  cost  of  production  as  might  be  required 
from  time  to  time,  the  cost  being  calculated  from  the  date  on 
which  the  contractor  or  manufacturer  shall  commence  work, 
of  which  date  the  contracting  officer  of  the  Ordnance  was  to 
be  notified. 

Four  Essential  Factors  in  Cost-Plus  Contracts 

On  these  general  rules  of  procedure,  the  following  defini- 
tions of  cost  in  contracts  were  laid  down,  consisting  of  four 
elements: 

(i)  The  cost  of  all  direct  labor  paid  for  by  the  contractor. 

(2)  The  cost  of  all  direct  materials  contained  in  or  forming 
part  of  the  articles  contracted  for. 

(3)  Prorata  share  of  factory  overhead  expenses  applicable 
to  and  necessary  in  connection  with  the  manufacture  of  the 
articles  contracted  for. 

(4)  Prorata  share  of  administrative  and  general  expenses 
applicable  to  and  necessary  in  connection  with  the  manufac- 
ture of  the  articles  contracted  for. 

Direct  labor  in  the  sense  here  required  applies  only  to  pro- 
ductive labor  on  the  work  under  contract.  The  contractor 
shall  maintain  a  daily  time  report  in  connection  with  each 
workman  engaged  on  direct  labor,  setting  forth  the  descrip- 
tion of  work,  the  parts  of  the  article  worked  on  and  number  of 
hours  chargeable  to  said  article,  the  quantity  of  pieces  com- 
pleted, hourly  rate  of  piecework  price,  the  amount  of  over- 


WAR   CONTRACT   OPERATIONS  II9 

time  allowed  and  the  total  amount  earned.  The  contractor 
was  required  to  maintain  these  daily  time  reports  and  the 
information  classified  thereon  so  as  to  readily  determine  the 
cost  of  all  direct  labor  applicable  to  any  operation.  It  pro- 
vided, finally,  that  "the  rate  of  wages  paid  shall  not  exceed 
the  rate  of  wages  being  paid  for  the  various  classes  of  labor 
involved  in  the  locality  in  which  the  work  is  done.  In  gen- 
eral, salaries  and  wages  will  conform  to  the  necessities  of  the 
situation." 

« 

In  the  control  of  material  cost  the  role  of  the  inspector  has 
a  larger  part.  Consequently  the  provisions  as  to  what  is 
included  and  what  not,  are  far  more  elaborate  in  detail. 
Three  features  embody  the  major  regulations,  however,  in- 
cluding (a)  the  preparation  of  a  complete  bill  of  materials 
setting  forth  the  kind,  quality,  cost  per  article  or  unit  of  prod- 
uct, at  discount  prices,  or  net  prices;  (b)  that  materials  and 
supplies  shall  be  kept  in  separate  storage  as  purchased  for 
contract  account,  and  (c)  that  the  inspectors  and  auditors 
representing  the  contracting  officer  shall  at  all  times  have 
access  to  those  places  where  materials  in  connection  with  the 
articles  contracted  for  are  received,  stored,  used,  processed 
and  shipped,  and  all  the  records  maintained  in  connection 
therewith.  Receipts,  consumption  in  production,  stocks  on 
hand,  etc.,  must  always  balance  according  to  the  records. 

In  the  item  of  overhead  expenses,  the  elements  of  salaries 
of  foremen,  shop  superintendents,  clerical  work  and  indirect 
(unproductive)  labor,  also  the  material  equipment,  such  as 
machinery,  tools,  taxes  and  insurance  in  proportion,  and  the 
like,  are  included.  The  principal  accounts  under  this  head 
are  divided  into  thirteen  divisions  to  cover  factory  depart- 
ments. There  are  six  other  items  under  maintenance  of 
buildings,  and  five  covering  factory  management  and  general 
plant  expense.  The  cost  of  building,  maintenance,  factory 
management  and  of  all  nonproducing  departments  is  thus 
distributed  over  the  producing  departments  to  the  extent  of 
its  entering  into  the  cost  of  the  product  made. 

Finally,  the  administrative  and  general  expenses  are  ac- 


120  GOVERNMENT   WAR    CONTRACTS 

cepted  as  the  fourth  element  of  costs,  in  so  far  as  the  admin- 
istration and  general  office  activities  contribute  to  the  fulfil- 
ment of  the  contracts  with  the  United  States.  Under  this 
head  there  are  eight  separate  accounts  suggested,  including 
salaries,  taxes,  stationery,  postage,  travel  and  incidentals. 
Where  the  entire  product  of  the  factory  is  devoted  to  the  con- 
tract work  for  the  United  States,  the  entire  administrative 
and  general  expenses  become  a  charge  on  the  contract  cost. 

These  cost  schedules  represent  the  best  judgment  of  tech- 
nical accounting.  Its  application  in  control  of  contracts  is 
then  only  a  question  of  getting  inspection  and  auditing  talent 
to  do  the  work. 


CHAPTER   IX 
A  Typical  Ordnance  Contract — Service  Rifles 

Among  the  nine  separate  divisions  into  which  the  Ordnance 
Office  of  the  War  Department  divided  its  work  during  the 
fiscal  year  191 8,  that  of  Procurement  alone  had  to  do  with 
the  preparation  and  execution  of  contracts.  All  the  depart- 
ment's contracting  is  done  through  some  one  of  its  fourteen 
sections  to  which  the  negotiation  of  contracts  is  assigned,  ac- 
cording to  the  character  of  the  material  contracted  for.  The 
Procurement  Division  is  thus  charged  with  the  purchase  of 
all  the  fighting  materiel  of  the  army,  such  as  artillery,  ammuni- 
tion, tanks,  tractors,  small  arms  and  small  arm  ammunition, 
machine  guns,  etc.  The  volume  of  operations  of  this  contract- 
ing division  in  the  year  under  consideration  may  be  measured 
by  the  fact  that  nearly  16,000  contracts  were  placed,  having 
a  money  value  of  $5,000,000,000  approximately,  including 
an  outlay  of  $325,000,000  in  the  work  of  increasing  the 
manufacturing  facilities  of  the  country  in  the  effort  to  meet 
promptly  and  effectively  the  ordnance  needs  of  the  army.^ 

Closely  associated  are  the  two  other  divisions  that  have  to 
do  with  contract  operations,  namely,  Production  and  Inspec- 
tion. The  Production  Division  expedites  production  of 
ordnance  materiel  by  placing  at  the  service  of  arsenals  and 
manufacturers  every  known  means  to  stimulate  operating 
functions.  It  placed  in  excess  of  11,000  orders  in  1918,  with 
over  4,000  contractors,  erected  59  factories  and  enlarged  171, 
thus  assisting  230  manufacturers,  expending  funds  in  the 
development  of  manufacturing  facilities  amounting  to  $420,- 
000,000.2     Inspection  of  contracts  cost  $13,000,000. 

Of  the  total  expenditures  of  $5,443,000,000  in  the  great 
munition  producing  year  of  the  war,  the  manufacture  of 
small  arms  did  not  much  exceed  8  per  cent  of  the  aggregate. 

^  Report  of  the  Chief  of  Ordnance,  War  Department,  1918,  pp.  11-13. 
^ Ibid.,  under  "Production  Division,"  etc. 

121 


122  GOVERNMENT   WAR   CONTRACTS 

Thus  the  very  weapon  which  some  of  the  best  military  authori- 
ties still  regard  as  "the  most  important  weapon,  notwith- 
standing the  prominence  given  to  artillery  and  to  machine 
guns,  and  notwithstanding  the  new  implements  of  war,  such 
as  the  airplane  and  things  of  that  type,"  had  cost  the  country 
an  insignificant  amount  compared  with  the  wasted  outlay  on 
airplanes  that  never  arrived.^  In  fact,  according  to  the 
official  report  of  the  commanding  general  in  France,  about 
the  only  weapon  that  did  arrive  of  American  make  in  effective 
quantities,  to  enable  our  men  to  take  a  share  in  the  battles  of 
the  war,  was  the  modified  Enfield  rifle  of  the  model  of  19 17. 

Factors    Affecting    the    Cost-Plus    Rifle    Contracts 

At  the  outbreak  of  the  war  our  army  had  rifles  enough  to 
supply  a  force  of  a  million  men.-  These  were  mostly  of  the 
Springfield  model  of  1903,  then  the  army  standard  rifle. 
There  were  difficulties  in  the  way  of  manufacturing  this  type 
in  sufficient  quantities,  although  our  first  divisions  of  troops 
sent  to  France  were  armed  with  the  Springfields,  then  demon- 
strated as  probably  the  best  implement  of  its  kind  in  the 
world.  The  manufacturing  of  parts  continued  and  the  two 
arsenals,  then  producing  at  the  rate  of  700  a  day,  maintained 
the  supply.^  This  was  made  all  the  more  difficult  by  the 
policy  of  the  government  prior  to  191 7  to  cut  down  the  appro- 
priations for  small  arms  and  ammunition.  The  only  two 
arsenals — Rock  Island  and  Springfield — that  had  manufac- 
tured these  rifles  of  1903  model  were  reduced  to  450  per  eight 
hour  day.  When,  therefore,  in  the  early  part  of  191 7,  it  was 
desirable  to  expand  the  rifle  capacity  of  our  government 
plants,  its  skilled  employes  had  been  scattered  into  other 
pursuits  and  the  few  that  could  be  recovered  only  served  to 
emphasize  the  shortsightedness  of  Congress  and  of  others 
responsible  for  virtual  abandonment  of  this  fundamental 
implement  of  national  defense. 

1  War  Expenditures  Hearings,  Ser.  I,  part  5,  p.  463.  Testimony  of  General 
Crozier. 

2  Ibid.,  p.  463. 

3  Annual  Report  of  the  Secretary  of  War,  1918,  p.  42. 


WAR  CONTRACT  OPERATIONS  1 23 

This  was  the  situation  when  the  question  arose  as  to  what 
model  of  service  rifle  could  best  be  produced  in  quantities  to 
equip  our  increasing  army.  Why  not  the  Springfield  of 
1903?  It  was  the  standard.  It  was  the  best  of  its  kind. 
Why  not  expand  producing  capacity  at  government  arsenals 
and  armories  as  well  as  in  private  plants? 

The  answer  is  simple  when  the  situation  is  known  on  the 
manufacturing  side  of  the  problem.  It  takes  ordinarily  about 
a  year  or  more  of  preliminary  work  to  make  the  machinery 
and  tools,  such  as  gauges,  jigs,  dies,  etc.  These  have  to  be 
put  at  the  service  of  manufacturing  contractors  in  order  to 
make  a  start  at  rifle  production,  to  say  nothing  about  special 
machinery  and  training  or  assembling  skilled  employes  of 
superior  technical  talent.  This  is  what  the  Ordnance  Office 
had  asked  for  as  an  emergency  consideration  months  before 
war  occurred,  only  to  be  refused  on  what  to  the  laical  mind 
now  seem  specious  excuses.  Our  Ordnance  was  not  able  to 
make  a  respectable  impression  on  the  problem  of  governmental 
supply  of  its  own  standard  army  rifle,  and  it  had  been  denied 
the  often  urged  provision  of  having  in  readiness  the  necessary 
manufacturing  implements  so  that  private  plants  could 
quickly  be  enlisted  for  equipping  troops.  As  it  was,  thousands 
of  our  troops  saw  almost  nothing  of  rifles  before  embarking 
for  France. 

Why  the  Modified  Enfield  Rifle  Was  Adopted 

Thanks  to  governmental  shortsightedness,  the  choice  of  the 
best  American  model  of  service  rifles  was  out  of  the  question 
as  a  manufacturing  proposition  for  1,500,000,  3,000,000  or 
5,000,000  troops.  How  true  that  is  may  be  inferred  from  the 
fact  that  by  November  8,  1918,  only  312,878  Springfield  rifles 
had  been  made  at  the  two  government  arsenals. ^  The  situa- 
tion was  saved  by  the  presence  of  several  rifle  manufacturing 
concerns  in  the  United  States  which  had  for  the  better  part 
of  two  years,  19 15  and  191 6,  worked  on  large  contracts  for 
British,    French   and   Russian   rifles.     By   the   beginning  or 

^  America's  Munitions,  1917-1918,  p.  183. 


124  GOVERNMENT   WAR   CONTRACTS 

middle  of  1917  these  engagements  had  been  practically  worked 
out.  The  foreign  governments,  especially  Great  Britain,  had 
supplied  and  owned  the  machinery.  It  was  ascertained  that 
this  could  be  purchased  by  the  United  States  Government. 
Later  we  paid  about  half  its  cost  for  the  rifle  making  machin- 
ery.^ This  machinery  had  produced  the  British  Enfield  rifle, 
model  of  1914.  Could  that  implement  be  made  acceptable  to 
arm  American  infantrymen?  If  so,  a  short  cut  to  the  solu- 
tion of  the  ser\'ice  rifle  supply  problem  was  in  sight.  Here 
were  at  least  three  large  scale  industries  equipped  with  ma- 
chinery, and  with  a  working  force  of  skilled  labor  ready  to 
enter  on  quantity  production  as  soon  as  final  specifications 
and  drawings  came  from  the  ordnance  authorities.  The  En- 
field model  was  near  enough  to  the  Sprinfield  model  in  impor- 
tant characteristics  to  admit  of  adaptation  to  American  needs. 
If  so,  then  it  was  either  a  question  of  building  up  plants  for 
making  American  Springfields,  including  tools  and  machinery; 
or  of  adopting  outright  the  British  rifle  in  toto,  or  of  modifying 
the  Enfield  to  fit  our  ammunition  of  the  standard  caliber  of  .30 
as  against  the  impossible  British  rimmed  cartridge  of  .303. 
As  in  the  airplane  program  we  tried  to  build  the  plane  about 
the  engine,  the  Liberty  motor;  so  in  the  rifle  program  we 
decided,  in  a  sense,  to  construct  the  musket  around  the  bullet. 
In  the  execution  of  this  program  the  three  manufacturing 
plants  brought  a  fund  of  valuable  experience  to  the  aid  of  the 
designers  and  procurement  officials  in  repeated  consultation. 
Thanks  to  this  cooperation,  the  requirements  were  soon  met 
sufficiently  to  proceed  with  manufacturing.  But  the  official 
attitude  kept  on  modifying  the  design.  This  modification 
became  a  source  of  delay  and  was  often  discouraging  because 
of  the  disposition  to  keep  making  alterations  on  the  part  of 
the  ordnance  authorities.  After  the  responsible  officer  had 
approved  a  model  and  one  if  not  two  of  the  three  manufac- 
turers had  started  to  manufacture,  a  successor  in  the  kaleido- 
scope of  official  shifts  in  Washington  submitted  a  list  of  51 
changes  of  parts,  thereby  holding  up  the  whole  production 

^Investigation  of  the  War  Department,  Part  2,  pp.  431-432. 


WAR   CONTRACT    OPERATIONS  125 

program  for  final  specifications  duly  signed  by  the  contracting 
officer.^  Although  one  of  the  earliest  conferences  on  this  sub- 
ject occurred  with  responsible  war  and  congressional  officials 
in  February  or  March  before  war  was  declared,  it  was  not 
until  August  24  that  this  overparticular  process  of  making 
changes  came  to  an  end,  so  that  manufacturing  could  be 
begun  on  the  basis  of  final  drawings.  ^  The  entire  program 
was  held  back  by  insisting  on  interchangeability  of  parts 
beyond  reasonable  limits  and  on  such  nonessentials  as  a  uni- 
formity to  a  two-thousandths  of  an  inch  on  the  bayonet 
blade. ^ 

Rifle  Contractors  Insist  on  Cost-Plus  Contract 

There  were  three  factors  entering  into  the  production  of 
rifles  by  the  three  contracting  concerns  for  the  United  States 
rifle  model  of  191 7.  Each  of  the  three  concerns — the  Win- 
chester Repeating  Arms  Co.  of  New  Haven,  the  Remington 
Arms  Co.  of  Ilion,  New  York,  and  the  Remington  Arms  Co.  of 
Eddystone,  Pennsylvania — had  been  threatened  with  finan- 
cial failure  by  the  extremely  high  ratio  of  rejections  in  the 
early  stages  of  the  production  of  rifles  for  the  British,  French 
and  Russian  Governments.  That  was  their  upper  millstone ; 
the  lower  was  the  rapidly  rising  costs.  Between  the  two  they 
saw  their  doom.  Seeing  the  threatening  result  of  the  contin- 
uance of  such  a  policy  of  rejection  of  commercially  acceptable 
products,  the  contracting  concerns  went  to  the  bankers 
through  whom  the  orders  had  come,  laying  the  situation 
before  them  and  warning  them  that  unless  the  attitude  of  the 
official  inspection  was  changed  so  as  to  base  acceptance  on 
essentials,  every  one  of  the  manufacturers  of  rifles  would  be 
obliged  to  abandon  his  contract.  This  meant  not  only  failure 
of  rifle  supplies  for  the  European  Allies,  but  also  the  general 
refusal  among  American  industries  to  take  foreign  contracts 

^  Testimony  of  J.  E.  Otterson,  Investigation  of  War  Department,  Part  2,  pp. 
409-411. 

'^America's  Munitions,  1917-1918,  p.  182. 

2  Also  testimony  of  Fred  H.  Calvin,  Editor,  American  Machinist,  Part  2,  pp. 
435-436,  Investigation  of  War  Department. 


126  GOVERNMENT   WAR  CONTRACTS 

at  any  but  the  most  speculative  prices.  The  standard  of 
J\merican  Gov^ernment  ordnance  inspections  was  an  equally 
extra-hazardous  risk,  against  which  the  contractors  could  not 
appeal  to  bankers  as  negotiators  of  contracts.  That  element 
of  cost  was,  as  the  contractors  reasoned,  a  government  risk 
and  could  not  be  assumed  by  the  other  party  to  the  bargain.^ 
A  second  factor  in  the  manufacturers'  viewpoint  was  that 
the  rifle  finally  adopted  had  practically  been  made  ov^er  into  a 
new  and  different  model  from  the  British  Enfield  of  1914. 
That  opened  the  whole  question  of  whether  after  all  these 
changes  in  plans  and  parts,  in  design  and  technique,  the 
machinery  and  tools  with  which  the  British  rifles  were  made 
would  not  have  to  be  radically  altered  if  not  scrapped  to 
produce  the  American  model  of  191 7.  This  view  proved  in 
general  to  be  groundless.  The  Ordnance  agreement  as  usual 
reserved  the  right  of  the  contracting  officer  or  his  superiors  in 
office  to  inject  any  desired  changes  in  plans  and  specifications 
at  any  stage  of  the  manufacturing  process.  Of  course,  this 
would  be  at  government  cost,  but  that  must  be  figured  into 
the  cost  of  delays  in  the  schedule  of  the  factory,  in  completing 
one  job  or  contract  to  make  way  for  the  next  one  already 
signed  up  for  other  parties.  Already  five  months  of  the  most 
precious  time  had  been  used  in  planning  and  designing  a  rifle 
that  could  just  as  well  have  been  done  before  war  broke  out, 
if  those  at  the  head  of  the  military  establishment  had  not  as  a 
matter  of  persistent  policy  held  up  on  some  pretext  the  most 
basic  work  of  ordnance  designing.  Now  that  the  type  had 
been  developed,  the  criteria  of  standardization  fixed,  and  the 
principle  of  interchangeability  embodied,  so  that  a  screw- 
thread  measuring  a  thirty-second  of  an  inch  made  at  Eddy- 
stone  must  fit  into  the  corresponding  thread-hole  as  made  at 
Ilion  and  New  Haven,  who  should  in  fairness  and  justice 
assume  the  industrial,  the  mechanical  and  the  financial  risks 
of  turning  out  a  noncommercial  instrument  of  precision? 
Certainly  no  open  eyed  investor  could  be  asked  to  assume 

^  War  Expenditures  Hearings,    Testimony  of  General  Crozier,   Ser.  I,  part 
5.  P-  490. 


WAR   CONTRACT    OPERATIONS  I27 

such  a  responsibility  for  the  government.  These  plants 
could  beat  the  world  in  making  products  to  the  commercial 
standards;  as  for  the  government's  standards — well,  one  never 
knows  exactly  what  they  might  be  until  the  actual  product  had 
passed  the  inspection.  In  short,  that  made  the  rifle  in  ques- 
tion, as  it  did  of  many  other  products  under  contract  for  the 
government,  a  distinctly  speculative  product.  And  it  is  a 
principle  of  economic  life  that  the  experimenter  has  to  assume 
the  risk.     Hence  the  cost-plus  contract  in  the  rifle  orders. 

The  third  factor  in  determining  the  form  or  type  of  rifle 
contract  was  the  economic  situation  generally.  The  earlier 
contracts  for  munitions  for  the  European  governments  were 
taken  at  prices  so  apparently  lucrative  as  to  set  the  stock 
market  going  into  an  orgy  of  speculative  debauch  over  the 
profits  anticipated.  But  these  proved,  under  later  cost 
conditions,  to  be  only  dead  sea  apples,  as  wage  schedules  rose 
on  the  strength  of  striking  employes,  and  materials  sought 
new  price  levels  from  week  to  week.  Instead  of  phenomenal 
profits,  many  manufacturers  pocketed  losses,  and  not  a  few 
were  bankrupted  on  these  contracts.  A  contractor  figuring  on 
steel  billets,  for  instance,  at  $19,  July,  1914,  could  not  have 
expected  to  pay  $42  in  July,  191 6,  and  $100  in  July,  191 7. 
Yet  that  was  the  situation  through  w^hich  many  munition 
makers  had  come,  the  wiser  for  their  experience,  during  this 
prewar  period. 

Ordnance  Corps  Meets  Changed  Conditions 

These  statements  reflect  essential  factors  in  the  contractors' 
point  of  view.  On  the  government's  attitude  it  may  be  best 
to  quote  the  exact  language  of  the  Chief  of  Ordnance  who 
represented  the  army  in  the  bargaining  procedure:^ 

One  of  the  earliest  contracts  of  magnitude  that  was  made  after  we  got  into  the 
war  was  the  contract  for  the  manufacture  of  rifles.  .  .  .  We  made  con- 
tracts with  three  manufacturing  estabUshments.  .  .  .  That  was  a  contract 
in  which  the  consideration  was  the  cost  of  manufacture  plus  a  percentage  of  the 
cost  for  profit.  It  was  entered  into  after  a  consultation  between  myself  and  some 
of  my  assistant  officers  and  the  president  of  the  General  Munitions  Board,  as  it 

1  War  Expenditures  Hearings,  Ser.  I,  part  5,  pp.  489-490. 


128  GOVERNMENT   WAR    CONTRACTS 

was  then  called,  and  the  manufacturers.  We  discussed  this  point  of  which  we  are 
at  present  speaking,  namely,  the  relative  advantage  of  the  percentage  system  of 
profit  and  the  fixed  sum  system  of  profits.     .     .     . 

General  Crozier:  As  between  us,  I  favored  the  method  of  a  fixed  sum  per 
rifle  and  not  a  percentage,  but  I  yielded  to  the  strong  aversion  of  the  manufacturers 
toward  that  method,  and  their  inclination  toward  the  percentage  method  of  com- 
pensation. I  say  I  yielded — Mr.  Scott,  the  chairman  of  the  General  Munitions 
Board,  and  I  yielded  on  that. 


I  think  that,  perhaps,  I  may  remind  you  that  these  rifle  manufacturers  had  had 
a  disastrous  experience  in  manufacturing  rifles  for  foreign  countries.  The  partic- 
ular three,  with  whom  we  were  dealing,  had  been  manufacturing  for  the  British 
Government.  They  absolutely  declined  to  make  any  proposition  of  a  price  that 
they  would  make  the  rifles  for  so  much  apiece.  They  said  they  did  not  know, 
they  could  not  know,  and  they  were  afraid  to  agree  to  manufacture  them  for  any 
given  price.  They  were  so  uncertain  as  to  the  amount  of  work,  trouble,  effort, 
labor  and  cost  that  would  be  involved  in  producing  the  degree  of  excellence  that 
we  might  require  that  they  did  not  want  either  to  commit  themselves  to  the  fixed 
profit  per  unit. 

Criticism  of  the  contractor's  attitude,  in  wanting  the 
government  to  take  all  of  the  risks,  was  voiced  by  some  of  the 
investigating  committees  of  Congress.  But,  as  the  Ordnance 
Office  explained,  the  government  was  quite  willing  to  take  the 
chances,  provided  the  work  could  be  done  at  something  about 
what  the  product  ought  to  cost. 

What,  then,  should  the  rifles  cost  and  who  was  to  determine 
that?  It  was  a  new  thing  for  the  Ordnance  Office  to  have  to 
put  a  staff  of  cost  accountants  into  the  factory  where  they 
were  having  war  materials  made,  so  as  to  ascertain  for  the 
government  just  what  the  product  in  question  actually  cost 
the  manufacturer.  An  entirely  new  division  in  the  ordnance 
work  was  thus  organized  under  the  control  and  direction  of  a 
cost  accountant  of  national  reputation.^  In  every  factory  and 
plant  where  any  of  the  16,000  orders  and  contracts  were  being 
worked  out  on  the  cost-plus  basis  there  were  cost  accountants, 
accountant  clerks  and  assistants  at  hand  to  record  just  what  of 
labor  costs,  of  material  costs,  of  overhead  and  general  expense 
items  entered  into  the  count  of  outlay.  Hitherto  the  Ord- 
nance Office  had  always  fixed  the  price,  so  that  what  an  article 

^  War  Expenditures  Hearings,  Ser.  I,  part  5,  pp.  483-484. 


WAR   CONTRACT   OPERATIONS  1 29 

cost  the  manufacturer  per  unit  was  not  a  matter  of  concern. 
Now  the  cost-plus  plan  was  a  condition  that  had  to  be  met, 
and  to  which  the  larger  contracts  of  this  department  were 
obliged,  as  its  chief  considered,  to  conform  until  conditions 
might  enable  them  to  change.  That  change  came  within  a 
year;  for  not  a  few  of  the  cost-plus  contractors,  after  finding 
themselves  master  of  the  conditions,  materials  and  process, 
were  willing  to  change  to  a  fixed  price  basis  for  their  own 
advantage. 


CHAPTER   X 

Some  Notable  Features  of  the  Rifle  Contracts 

One  of  the  outstanding  features  of  the  modified  Enfield 
rifle,  as  produced  under  the  cost  plus  percentage  contract,  was 
the  marked  reduction  in  cost  per  rifle.  The  testimony  of 
Mr.  Charles  H.  Schlacks,  General  Manager  of  the  Eddystone 
plant,  is  to  the  fact  that  on  November  30,  1917,  after  the  deliv- 
ery of  the  first  100,000  rifles  on  the  contract  for  475,000  rifles, 
the.  average  cost  per  rifle  at  that  plant  had  been  brought  down 
to  $25.  The  cost  to  the  British  Government,  for  the  rifles 
made  by  the  same  firm,  the  Enfield  of  1914,  an  equally  difficult 
model  to  produce,  was  $42.  As  General  Crozier  told  the  Con- 
gressional committee,  had  a  fixed  price  contract  been  made 
with  the  rifle  makers,  they  would  have  cost  not  less  than  they 
cost  the  British.  As  it  turned  out,  the  government  paid  about 
$26  apiece.  Thus,  at  a  time  when  wage  costs  and  material 
prices  were  still  rising,  there  was  a  reduction  of  38  per  cent  per 
rifle  on  the  cost-plus  plan.  On  the  2,202,426  rifles  made  by 
the  Eddystone  plant  that  must  have  been  a  saving  under  this 
form  of  contract  of  $37,441,293.1  That  result  is  a  credit  to 
manufacturers  and  government  alike,  instead  of  being  a  cause 
for  complaint  as  to  the  form  of  contract  or  the  profits  to  the 
industry.  It  is  no  less  a  credit  to  the  cost  accounting  systems 
which  were  in  force  by  contractor  and  Ordnance  Office  in  the 
effort  to  control  costs. 

The  rifle  record  of  the  government  during  the  war  was  one 
of  its  best  achievements.  It  reveals  the  noteworthy  fact  that 
in  a  total  production  of  these  implements  to  November  8, 
1918,  three  days  before  the  armistice,  of  2,506,307  rifles,  the 
three  factories  at  Eddystone,  Ilion  and  New  Haven  turned  out 
2,193,330  and  the  government  arsenals  at  Rock  Island  and 
Springfield  only  312,977,  showing  that  seven-eighths  of  the 

^  America's  Munitions,  1917-1918,  p.  184. 

130 


WAR   CONTRACT    OPERATIONS  I3I 

output  of  infantrymen's  service  rifles  were  made  under  this 
cost-plus  type  of  award  by  private  concerns. 

Comparative  Output  under  Cost- Plus  Contracts 

That  the  government  was  getting  the  better  of  the  bargain 
by  reason  of  progressive  reduction  in  costs  per  rifle  is  proved 
by  the  fact  that  it  refused,  sometime  during  191 8,  to  accept  a 
proposal  from  the  manufacturers  to  substitute  a  fixed  compen- 
sation per  unit  in  the  place  of  the  percentage  on  cost.  This 
occurred  after  the  making  had  been  gotten  well  in  hand  so 
that  under  the  new  conditions  the  elements  of  expense  could 
be  reasonably  anticipated.  The  government  found  that  it 
was  getting  its  rifles  at  a  lower  cost  under  cost  plus  10  per 
cent  than  it  could  under  a  cost  plus  a  fixed  sum  per  rifle. 

A  comparative  statistical  summary  of  rifle  production  is 
herewith  reproduced,  from  the  official  report  of  Benedict 
Crowell,  Director  of  Munitions,  showing  output  by  months 
during  most  of  the  war  era^  by  the  three  private  contracting 
firms  and  the  two  arsenals  engaged  on  small  arms : 

COMPARATIVE  STATEMENT  OF  RIFLE  PRODUCTION  AUGUST.iqit, 

to   NOVEMBER   8,    1918 

Months                   Eddy-  Win-  Spring-  Rock 

stone  Chester  Ilion  field  Island  Total 

1917 

Before  August  i 14,986  1,680        16,666 

August  I  to  December 

31 174,160  102,363  20,364  89,479  22,330  414,696 

1918 

January 81,846  39,200  32,453  29,890  7,680  185,069 

February 98,345  32,660  39,852  6,910  2,460  180,227 

March 68,404  42,200  49,538  120  420  160,682 

April 87,508  43,600  36,377  2,631      170,116 

May 84,929  41,628  54-477  3,420  550  185,004 

June 104,110  34,249  52,995  6,140  619  198,113 

July 135,080  35,700  60,413  14,841  2,038  248,072 

August 106,595  20,030  65,144  27,020  1,597  220,386 

September 101,058  31-550  58,027  29,770  3,813  233,218 

October 100,214  33,700  53-563  35-920  3,256  226,653 

November 30,659  9,100  16,338  10,500  808        67,405 

Total 1,181,908      465,980      545-541      265,627        47,2512,506,307 

The  Springfield  and  Rock  Island  output  were  entirely  of  the  Springfield  model 
of  1903,  while  the  private  plants  at  the  other  three  places  of  manufacture  were 
engaged  wholly  on  the  Enfield  model.  Both  of  these  models  were  based  on  the 
use  of  the  standard  .30  caliber  ammunition. 

^America's  Munitions,  1917-1919,  p.  186. 
10 


132  government  war  contracts 

Record  of  the  Eddystone  Rifle  Plant 

Probably  no  other  part  of  America's  munitions  production 
came  so  near  meeting  the  existing  requirements  of  our  Expe- 
ditionary Forces  as  did  the  manufacture  of  service  rifles. 
Among  all  of  the  humiliating  failures  this  achievement 
stands  out  boldly  as  an  exception  to  the  rule  of  shortcoming 
in  actual  hostilities.  Not  only  were  the  rifles  developed  and 
designed  in  large  part  by  the  manufacturers'  cooperation  with 
the  ordnance  specialists  of  the  government;  they  were  deliv- 
ered ahead  of  the  contract  schedule,  so  that  every  soldier  when 
he  stepped  on  to  the  transport  to  sail  for  France  was  handed 
a  musket  as  his  own.  In  the  earlier  supplies  the  arsenals  fur- 
nished Springfields;  the  contracting  firms  did  not  begin  to 
deliver  until  midsummer  and  autumn  of  191 7-  Their  con- 
tracts with  Great  Britain  ran  out  in  June-July,  and  their  first 
deliveries  of  Enfields  to  our  government  were  as  follows: 
From  the  Winchester,  which  had  begun  on  an  incompletely 
developed  model,  August  18,  or  51  days  after  completing  the 
British  contract;  from  Ilion,  October  28,  or  99  days  after  end- 
ing the  British  award;  and  from  Eddystone,  September  10, 
or  102  days  from  the  time  the  British  contract  was  finished  on 
June  I.  By  February  2,  1918,  these  three  plants  were  turning 
out  7,805  military  rifles  a  day,  and  for  the  week  ending  with 
that  date  these  plants  with  the  two  arsenals  produced  50,873 
guns.  By  the  middle  of  June  we  had  reached  the  million  and 
a  half  mark,  including  a  quarter  of  a  million  contracted  for 
the  Russians  but  not  delivered  for  obvious  reasons.  Eighty- 
seven  per  cent  of  these  were  contract  rifles,  and  of  all  produced 
in  arsenals  and  private  plants  combined  the  Eddystone  rifle 
plant  of  the  Midvale  Steel  and  Ordnance  Company  had  the 
honor  of  contributing  47  per  cent,  or  nearly  half  of  all  pro- 
duced, and  more  than  half  of  the  output  of  the  three  contract- 
ing companies. 

The  achievements  of  the  Eddystone  plant  and  its  working 
staff  deserve  more  than  passing  attention.  It  is  something  to 
the  credit  of  its  management  and  directors,  its  officers  and 
employes,  and  the  government's  staff  working  with  them,  to 


WAR  CONTRACT  OPERATIONS  1 33 

have  gone  through  the  war  time  debauch  of  strike  infested 
industries  and  professional  wage  boosting  with  practically  no 
labor  disturbances  and  with  a  payroll  of  as  many  as  15,409 
employes  whose  average  wage  for  the  war  era  was  not  over 
$25  a  week.  Of  these  3,000  were  women.  Their  presence 
was  made  necessary  by  the  inroads  of  the  selective  draft  which 
took  many  of  the  most  skilled  men,  in  spite  of  efforts  to  have 
them  exempted.  In  fact,  the  chief  difficulty  was  the  securing 
and  retaining  of  employes  throughout  the  entire  contract. 
The  shipyards  in  the  vicinity  on  the  Delaware  competed  mer- 
cilessly, offering  labor  certain  housing  facilities,  absolute 
exemption  from  military  service,  lower  passenger  fares,  higher 
pay  and  widely  advertised  encomiums  on  the  patriotic  supe- 
riority of  shipbuilding  over  rifle  making.  In  plain  English, 
the  Hog  Island  concern  ruled  the  labor  market.  By  April, 
191 8,  the  difficulty  of  obtaining  adequate  help  was  so  great 
that  women  inspectors  and  women  machine  operators  had  to 
be  employed  for  the  first  time  in  the  manufacturing  depart- 
ments. Four  months  later  not  even  enough  women  could  be 
secured;  the  supply  of  skilled  or  even  semi-skilled  machine 
operators  was  apparently  exhausted.  This  undersupply  of 
man  power  when  skilled  labor  was  absolutel}^  essential  no 
doubt  lowered  the  production  capacity  of  the  entire  plant. 
Even  this  difficulty  could  have  been  overcome  but  for  the 
accelerated  turnover  to  which  the  government's  ever  advanc- 
ing wage  awards  were  tempting  the  rank  and  file  of  floating 
labor  supply.  Only  part  of  the  inability  of  individual  con- 
cerns to  take  in  unskilled  workers  and  hold  them  long  enough 
to  school  them  intensively  for  the  performance  of  skilled  jobs 
was  inherent  in  the  conditions;  part  of  the  difficulty,  and  prob- 
ably the  major  part,  was  due  to  the  pernicious  policy  of  bribing 
misled  labor  not  to  strike  by  progressively  increasing  their 
wages  to  double  the  ordinary  rates  while  the  military  arm  of 
government  was  leading  millions  to  the  battle  front  at  a  com- 
pensation of  food  and  clothing  and  $30  a  month.  The  self- 
restraint  of  the  Eddystone  staff  of  workers,  drawn  mainly  as 
is  known  from  plain  American  homes  in  town  and  country 


134  GOVERNMENT   WAR    CONTRACTS 

into  what  they  regarded  as  a  national  service,  makes  one  of  the 
most  enviable  chapters  of  industrial  loyalty  in  the  history  of 
the  war  era.^ 

Putting  National  Conscience  into  Plant  Control 

Not  the  least  proof  of  this  quality  of  citizenship  was  ex- 
hibited in  the  manner  in  which  this  plant  protected  its  opera- 
tions against  the  presence  of  enemy  alien  sympathizers.  Its 
trusted  leaders  and  mechanics  were  organized  into  a  Vigilance 
Corps  sworn  individually  to  safeguard  the  work  of  the  com- 
pany and  government.  This  agency  was  especially  alert 
against  all  disaffection  tending  to  defeat  the  purpose  of  main- 
taining a  morale  devoted  to  the  service  of  the  nation  by  equip- 
ping the  men  at  the  front  with  the  best  possible  rifle  in  the 
shortest  possible  time. 

The  Eddystone  management  was  among  the  first  to  call  the 
attention  of  Congress  and  the  military  authorities  to  the  exist- 
ence in  this  country  of  highly  developed  facilities  for  rifle 
production.  Its  attitude  is  shown  in  the  fact  that  it  agreed  to 
deliver  in  quantities  in  six  months  time,  leaving  the  question 
of  the  definite  terms  of  the  contract  to  the  War  Department 
to  settle  later.  Verbal  authority  to  proceed  was  given  April 
20,  for  instance,  the  appropriation  authorized  June  15,  the 
contract  signed  July  12,  and  the  first  lot  of  rifles  delivered 
September  17.  That  bettered  the  contract  considerably 
w^hich  called  for  them  on  November  12,  just  56  days  later. 
In  fact,  this  company,  knowing  the  absolute  necessity  of 
gaining  time  as  an  industrial  factor  in  military  preparation, 
went  ahead  to  the  extent  of  spending  $750,000  of  its  own  funds 
on  government  account  before  it  was  formally  and  finally 
awarded  a  contract  on  which  it  could  draw  a  dollar  from  the 
public  Treasury.  Every  one  of  the  approximately  1,400,000 
rifles  made  by  the  Eddystone  plant  was  produced  under  the 
cost  plus  percentage  type  of  contract.  But  the  government 
was  always  represented  by  one  of  the  country's  best  equipped 
small  arms  specialists  and  the  manufacturers  and  their  work- 
ers put  a  national  conscience  into  the  control  of  costs. 

'  On  November  30,  1917,  80  per  cent  of  the  12,000  employes  were  native  born 
Americans,  1 1  per  cent  naturalized  citizens  and  9  per  cent  foreigners. 


CHAPTER   XI 

War  Contracts  Within  the  Navy 

Without  inviting  invidious  comparison  between  methods 
and  results  of  contracting  in  war  time  between  the  army  and 
the  navy,  it  is  fair  to  say  that  the  latter  arm  of  service  was  in 
much  the  closer  touch  with  the  economic  organization  of  the 
country  at  the  outbreak  of  war.  It  was  in  its  purchase  and 
supply  work  far  better  organized  to  meet  the  conditions  than 
was  the  War  Department  as  a  whole.  Its  Bureau  of  Supplies 
and  Accounts  stands  out  as  a  clear  demonstration  of  effective 
contract  relations  with  the  business  world.  Nor  is  that  the 
only  one  of  the  several  bureaus  w^hose  contracting  during  the 
war  proved  its  capacity  to  produce  results  without  culpable 
wastefulness. 

One  might  compare  the  aircraft  production  in  the  two 
respective  departments.  This  division,  in  the  Bureau  of 
Construction  and  Repairs,  not  only  combined  the  official 
experience  in  aircraft  engineering  and  design  with  that  in  the 
aeronautical  and  allied  industries  already  established,  but 
utilized  the  established  airplane  construction  plants  far  more 
persistently.  Compare  this  program  with  the  Deeds-Coffin 
procedure,  of  estranging  recognized  aircraft  capacity,  in  the 
army's  airplane  fiasco.     This  is  the  naval  policy: 

The  bureau  has  felt  that  in  the  rapid  development  of  aviation  all  possible  methods 
of  improvement  should  be  utilized,  and  for  this  reason,  in  addition  to  its  own  devel- 
opment work,  private  firms  have  been  encouraged  to  develop  designs  of  their  own 
conception  wherever  there  appeared  promise  of  success.  In  some  cases  the  types 
thus  built  have  proved  of  little  or  no  military  value;  others  have  shown  great 
promise.  In  all  of  this  work  there  has  been  close  cooperation  between  the  bureau 
and  the  private  firms. ^ 

In  its  contractual  operations  the  navy's  work  is  chiefly  that 
of  ship  construction,  ordnance  production,  mechanical  engi- 
neering and  building  operations.     In  all  of  these  it  adhered  far 

^  Annual  Report,  Chief  of  Bureau  of  Construction  and  Repairs,  191 8,  p.  13. 

135 


136  GOVERNMENT    WAR    CONTRACTS 

more  closely  to  peace  time  standards  of  cost  control  and  forms 
of  contract  than  had  been  believed  practicable.  Of  course, 
its  scale  of  contract  commitments  had  been  a  good  deal  smaller 
than  those  of  the  army.  Its  total  appropriations  for  the 
fiscal  year  1918  were  $2,226,000,000  compared  with  $5,730,- 
883,000  for  the  War  Department.  The  better  record  in  the 
control  of  its  contracts  was  no  doubt  due  in  a  large  measure 
to  its  being  ready  with  a  cost  keeping  organization  of  its  own. 
Of  this  the  Secretary  of  the  Navy,  in  his  annual  report  of  191 8, 
says: 

The  navy's  cost  accounting  system  has  been  enlarged  from  time  to  time  to 
handle  the  increased  volume  of  business. 

The  protection  of  the  government  from  wasteful  expenditure  under  the 
obvious  disadvantages  of  cost-plus  has  been  brought  about  through  the  prepara- 
tion of  a  standard  manufacturing  cost-plus  contract  devised  to  eliminate  improper 
charges  and  through  a  close  supervision  of  the  expenditures  as  made.  Cost-plus 
contracts  in  some  cases  were  unavoidable  because  of  pressing  emergency,  but  were 
resorted  to  only  when  absolutely  necessary  and  in  as  few  cases  as  possible.  Com- 
petition even  in  the  stress  of  war  conditions  has  been  the  rule.  Cost-plus  con- 
tracts were  emergency  exceptions  and  never  resorted  to  when  open  competition 
could  be  secured. 

Eleven  million  dollars  has  been  saved  during  the  year  by  establishing  control 
over  cost-plus  contracts  and  by  examination  of  costs  in  connection  with  fixed  price 
contracts.! 

In  the  chapters  following  herewith  some  analysis  is  made  of 
several  of  the  more  notable  applications  of  this  principle  of 
contractual  relation  between  one  of  the  great  departments  of 
government  and  the  business  world  in  time  of  war. 

^  Annual  Report  of  the  Secretary  of  the  Navy,  1918,  p.  98. 


CHAPTER   XII 
Navy's  Earlier  Uses  of  Cost-Plus  Contracts 

It  is  not  generally  known  that  the  earlier  use  of  the  cost-plus 
type  of  contract  in  governmental  deaHngs  had  been  developed 
in  the  navy.  That  was  the  case  some  years  before  the  war. 
It  was  found  that  any  department,  whether  in  war  or  peace, 
which  is  charged  with  a  vital  part  of  the  public  defense  must 
be  constantly  experimenting  to  incorporate  the  latest  effective 
elements  of  progress.  But  it  may  be  quite  out  of  the  question 
for  any  department  or  bureau  to  specify  in  advance  an  exact 
bill  of  costs  to  competing  bidders  when  it  comes  to  experi- 
mentation, for  instance,  in  naval  gunnery.  When  experi- 
mental problems  are  the  feature  of  the  production  required, 
it  has  been  proved  that  the  cost-plus  method  of  contracting 
often  serves  the  best  interests  both  of  the  government  and  of 
the  manufacturer.  This  is  especially  the  case  with  reputable 
concerns  having  a  well  developed  cost  accounting  system. 

In  its  original  form,  according  to  those  familiar  with  its 
initial  use,  this  plan  of  agreement  coincided  in  a  general  way 
with  the  adoption  of  scientific  cost  accounting  in  manufactur- 
ing industries;  so  that,  instead  of  being  the  instrument  of  a 
wasteful  and  unduly  expensive  method  of  public  contracting, 
this  policy  of  placing  awards  was  the  accompaniment  of  the 
introduction  of  more  scientific  methods  of  contracting. 

A  Fiduciary  Undertaking  in  Experimental  Fields 

It  is  true  that  a  certain  degree  of  business  integrity  is 
assumed  in  this  method  of  contracting.  As  betw^een  the 
sheep  and  the  goats  of  the  business  world,  the  selection  of 
honorable  firms  for  the  privilege  of  cooperating  with  the 
government  in  developing  a  miHtary  idea  is  considered  good 
business  in  times  of  peace ;  then  why  should  it  be  discouraged 
in  times  of  war?     In  the  practice  of  the  navy  the  cost-plus 

^2,7 


138  GOVERNMENT   WAR   CONTRACTS 

contract,  serving  as  a  pioneering  form  of  agreement,  limited 
the'  outlay  to  what  was  fair  and  reasonable  on  the  part  of 
the  cooperating  contractor.  It  was  the  navy's  duty  to  safe- 
guard the  public  interest  by  seeing  that  the  expenditure  was 
made  as  the  law  intended.  But  to  select  a  contracting  firm 
to  whom  the  experimental  results  were  of  far  greater  interest 
than  the  amount  of  compensation,  put  the  agreement  on  the 
basis  of  a  fiduciary  undertaking  bent  upon  getting  the  utmost 
scientific  or  technical  value  out  of  the  experiment.  Owing 
largely  to  such  considerations  as  these  the  navy  really  never 
abandoned  its  policy  of  using  this  form  of  contract  where  the 
nature  of  the  project  called  preferably  for  its  use. 

In  other  than  experimental  fields  of  manufacturing  for  the 
navy  the  fixed  price  contract  did  not  always,  under  war  con- 
ditons,  function  satisfactorily.  This  is  clearly  instanced  in 
the  annual  report  of  the  Paymaster  General  of  the  navy  for 
1918.  In  that  admirable  exposition  of  the  department's 
policy,  as  shown  in  the  methods  of  purchase  by  the  Bureau 
of  Supplies  and  Accounts,  the  preference  and  practice  is 
shown  prevailingly  to  be  in  favor  of  fixed  price  purchases. 
But  even  with  the  bureau's  excellent  facilities  for  price 
determining,  and  the  prior  inquiries  of  the  War  Industries 
Board  or  the  Federal  Trade  Commission,  this  agency  which 
bought  about  95  per  cent  of  the  navy's  supplies,  still  found  it 
advisable,  under  war  time  conditions,  to  resort  to  the  cost- 
plus  method  of  contracting.  It  was  a  necessity  of  the  man- 
ufacturing situation,  as  the  following  quotation  plainly  shows: 

The  situation  as  regards  wages,  costs  of  materials  and  financing  additional 
plant  capacity,  has,  of  course,  been  such  as  to  make  it  necessary  for  many  manu- 
facturers to  ask  for  cost-plus  contracts;  on  the  other  hand  the  navy,  in  order  to 
avoid  the  necessity  of  allowing  manufacturers  a  wide  margin  of  contingencies, 
has  found  in  many  cases  that  its  interests  required  either  a  cost-plus  contract  with 
a  continuous  and  careful  inspection  of  costs  thereunder,  or  special  investigations 
of  bids  and  estimates  whereby  a  fair  fixed  price  contract  could  be  entered  into  or 
a  fair  and  final  price  awarded  under  navy  commandeering  orders  for  manufacture.^ 

Of  course,  the  question  of  time  was  vital  in  all  such  deci- 
sions.    These  cost-plus  awards  saved  most  If  not  all  of  that 

1  Annual  Report,  Paymaster  General  of  the  Navy,  1918,  p.  91. 


WAR  CONTRACT  OPERATIONS  1 39 

loss  of  time  consumed  by  Investigation  prior  to  the  signing  of 
the  contract.  Under  its  provisions  the  investigation  could 
be  carried  on  as  a  procedure  parallel  to  the  assemblage  of 
materials,  the  working  up  of  raw  stuffs  and  its  conversion  into 
the  product  needed  for  warfare.  Checking  estimates  went 
on  side  by  side  with  the  manufacturing  process.  Nor  could 
there  be  any  unfairness  to  either  party  to  the  arrangement,  so 
long  as  both  the  contractor  and  the  government  had  com- 
petent cost  accounting  representatives  on  the  premises.  But 
there  was  substantial  gain  in  the  public  interest  by  the  earlier 
delivery  of  products  needed  to  wage  war. 

Pioneering  Risks  in  Novel  Production 

This  war  was,  furthermore,  unique  in  that  it  blazed  many 
new  trails  in  its  requirements  of  materials,  machinery  and 
munitions.  No  records  were  available  as  to  the  costs  of  the 
very  rapidly  developing  airplanes.  Designs,  from  which 
large  numbers  of  these  craft  were  made,  had  become  so  obso- 
lete within  four  months  that  no  responsible  government  would 
consent  to  their  being  used  even  in  ordinary  practice.  It  is 
always  so  in  a  rapidly  evolving  art  or  industry — the  risks 
must  be  borne  not  by  that  factor  in  the  industry  whose  total 
capital  invested  and  organization  would  be  wiped  out  by  a 
single  experimental  failure;  but  rather  by  the  party  to  the 
contract  whose  resources  are  adequate  to  bear  the  losses  of 
pioneering  experimentation.  Otherwise  the  industry  would 
be  self-exterminating  and  progress  arrested.  Only  on  this 
economic  basis  was  it  practicable  to  evolve  many  of  the 
machine  guns.  Even  so  common  a  product  as  the  service 
rifle  had  to  be  made  under  the  cost-plus  contract.  The  naval 
viewpoint  is  fairly  presented  on  this  phase  of  the  subject  in 
the  Paymaster's  Report  of  1918,  under  the  head  of  Cost-Plus 
Contracts.     Rear  Admiral  McGowan  there  says: 

When  the  contractor  has  no  past  experience  on  which  to  base  a  price,  where  the 
material  is  complicated  and  subject  to  changing  plans  and  specifications  or  wide 
fluctuations  in  raw  material  cost,  a  cost-plus  contract  has  been  employed.  Con- 
tracts for  novel  production,  particularly  along  the  lines  of  airplanes,  large  calibre 
guns,  and  shells  for  same,  steel  or  wooden  ships,  and  optical  glass  work,  have  been 


140  GOVERNMENT   WAR    CONTRACTS 

SO  handled.  It  has  also  been  found  necessary  to  place  such  contracts  in  cases  in 
which  the  contractor,  though  deserving  of  confidence,  lacked  sufficient  capital 
and  plant  equipment  and  in  certain  engineering  or  building  cases  in  which  a  cost- 
plus  contract  had  been  standard  since  its  authorization  by  section  120  of  the  act 
of  3  June,  1916.1 

Cost- Plus  Contract  a'  Wartime  Expedient 

It  has  become  clear,  however,  to  most  men  who  have  had 
practical  experience  with  public  contracting  that  there  are 
serious  handicaps  to  the  public  interest  in  this  method  of 
bargaining,  under  certain  conditions.  It  is,  as  has  been 
pointed  out,  an  expedient  of  an  emergency  character.  This 
applies  when  it  is  difficult  to  get  work  undertaken  on  the  com- 
petitive basis;  but  when  the  government  is  in  no  position  to 
determine  costs  or  check  contractor's  estimates  it  may  be 
easily  victimized. 

The  government  had  the  alternative  of  doing  the  work 
itself  at  its  own  expense  and  control ;  but  in  that  event  it  fails 
to  take  advantage  of  the  ready  made  organization  of  the 
manufacturer.  Urgency  of  demand  is  the  determinant  in 
war;  but  the  contractor  is  not  sufficiently  in  control  of  the 
elements  of  production  to  be  held  responsible  for  results. 
The  navy's  conclusions  are  timely  and  in  the  main  conclu- 
sive, because  of  its  cost  determining  outfit,  when  it  reports 
as  follows  on  the  use  of  the  cost-plus  contract : 

So  far  as  the  supplies  and  materials  are  concerned,  such  a  contract  has  prac- 
tically outlived  its  usefulness.  Undoubtedly  the  chief  benefit  which  has  resulted 
from  its  use  has  been  to  bring  the  manufacturing  public  to  an  appreciation  of  the 
government's  attitude  that  the  price  of  the  manufactured  product  should  be  based 
upon  its  cost  of  production  plus  no  more  than  a  reasonable  profit  thereover. 
Fortunately  the  defects  in  the  cost-plus  contract  were  realized  before  harm  had 
been  done  and,  as  a  result,  no  purchase  plan  would  now  be  considered  which  per- 
mitted the  manufacturer  to  lose  interest  in  keeping  his  cost  of  production  as  low 
as  possible.^ 

How  this  principle,  of  giving  the  contractor  an  interest  in 
keeping  down  the  costs,  was  applied  on  a  large  part  of  the 
vessels  constructed  during  the  war,  is  shown  in  the  next 
section. 

'  Annual  Report,  Paymaster  General  of  the  Navy,  1918,  pp.  24-25. 
2  Ibid. 


WAR   CONTRACT   OPERATIONS  I4I 

Cost  Plus  Fixed  Profit  in  Destroyer  Building 

Naval  construction  during  most  of  the  war  period  was 
restricted  rather  closely  to  lighter  vessels,  including  submarine 
chasers,  destroyers,  mine  sweepers  and  others.  The  larger  or 
capital  ships  were  a  minor  feature  of  the  program  in  the 
Bureau  of  Construction  and  Repairs.  For  the  fiscal  year 
ending  June  30,  1918,  a  total  of  355  submarine  chasers  was 
built  and  commissioned,  and  repeat  orders  given  for  100  more. 
Each  of  the  five  largest  private  shipyards  in  the  country  was 
awarded  large  orders  for  destroyers,^  in  which  the  form  of  con- 
tract was  the  cost  plus  fixed  profit  of  a  definite  sum. 

An  instance  of  this  kind  was  the  contract  for  twenty  de- 
stroyers placed  with  the  Newport  News  Shipbuilding  and  Dry 
Dock  Company,  dated  December  29,  191 7,  as  Department 
No.  899.  The  cost  in  this  case,  which  was  representative  of 
the  other  yards  as  well,  was  arrived  at  as  follows:  The  com- 
pensation shall  be  "the  actual  cost  plus  a  definite  sum  for 
profit,  based  upon  the  estimated  actual  cost  to  the  contractor, 
at  its  wage  schedule  in  force  on  October  11,  1917,  of  $1,500,- 
000."  Here  was  a  definite  basis  of  labor  value  on  which  to 
place  estimates  and  bids  on  a  piece  of  work  which  was  not 
awarded  until  80  days  after  the  basic  wage  date.  Possibly 
in  view  of  this  interval,  and  also  because  of  the  tendency  of 
wage  demands  to  become  more  excessive  as  the  war  progressed, 
the  torpedo  boat  destroyer  contracts,  in  this  and  other  cases, 
provided  for  a  wage  adjusting  on  the  October  11  basis.  If 
the  wage  schedule  were  increased,  the  stipulation  ran,  then  it 
was  to  be  added  accordingly  to  the  cost.  So  too,  if  the  esti- 
mated cost,  which  was  provisionally  basic  also,  was  increased 
or  decreased  by  changes  introduced  after  the  terms  of  the 
contract  had  been  settled,  then  the  adjustment  was  to  be 
measured  by  the  "net  cost  of  any  changes  in  the  plans  and 
specifications." 

Obviously,  the  wisdom,  under  the  circumstances,  of  this 
system  of  contracting  lay  in  putting  the  premium  on  the  de- 

1  Annual  Report,   Navy  Department,   Bureau  of  Construction  and  Repairs, 
1918,  p.  II. 


142  GO\^RNMENT   WAR   CONTRACTS 

crease  rather  than  on  the  increase  in  the  net  cost.  This  was 
accompHshed  by  placing  the  highest  total  fixed  profit  derivable 
at  a  definite  sum,  so  that  there  could  be  no  advantage  accruing 
to  the  contracting  shipbuilder  from  any  swelling  of  costs 
beyond  the  estimate.  On  the  other  hand,  some  mode  of  ad- 
justment had  to  be  devised  whereby  the  contractor  could  reap 
some  pecuniary  advantage  from  any  economy  in  costs  which 
would  bring  the  outlay  below  the  estimated  limit.  On  these 
vessels  it  was  provided  that  if  the  net  cost  exceeded  the  origi- 
nal total  of  $1,500,000  by  the  methods  prescribed,  then  the 
contractor  should  be  paid  $135,000  as  a  fixed  sum  for  profit, 
and  no  more.  That  figured  out  exactly  9  per  cent,  on  the 
estimated  cost  of  the  destroyer.  This  rate  may  be  compared 
with  a  corresponding  compensation  of  5  per  cent  for  an  expend- 
iture of  an  equal  amount,  in  the  building  construction  con- 
tracts on  the  cost-plus  basis  of  the  Quartermaster  General's 
Office,  War  Department,  of  which  there  had  been  so  much 
criticism.  While  it  is  true  that  these  two  jobs  are  so  different 
as  to  be  otherwise  hardly  comparable,  yet  it  can  not  well 
escape  notice  that  under  the  terms  of  the  building  construc- 
tion contracts,  as  developed  under  similar  war  time  condi- 
tions, the  fixed  profit  going  to  the  cantonment  or  warehouse 
contractor  would  be  but  $82,500  for  a  total  cost  ranging  from 
$1,500,000  to  $1,650,000;  whereas,  for  a  destroyer  of  that 
amount  of  cost  the  fixed  profit  was  $135,000  or  better. 

To  gain  a  larger  compensation  the  builders  of  these  destroy- 
ers had  to  attack  costs  in  the  other  direction.  Should  the 
actual  costs  be  found  to  be  less  than  the  estimated  amount  it 
was  provided  that  "the  contractor  shall  be  allowed  as  profit 
in  addition  to  $135,000  on  each  vessel  one-half  the  amount  by 
which  such  actual  cost  on  each  vessel  falls  short  of  the  esti- 
mated cost  revised  as  aforesaid."  Similar  premiums  on 
reducing  costs  by  as  wide  a  margin  as  practicable  below  the 
estimated  amount  did  not  always  accrue  to  the  contractor  by 
so  large  a  proportion  as  one-half.  In  the  same  company's 
contract  for  building  eight  oil  tank  steamers  awarded  over  a 
year  later  (October,  191 8,  or  a  month  before  the  armistice)  a 


WAR  CONTRACT  OPERATIONS  1 43 

fixed  profit  of  $220,000  was  placed  on  each  vessel  estimated  as 
costing  $2,200,000,  making  a  10  per  cent  profit.  The  con- 
tractor's additional  winnings  by  bringing  down  the  cost  were 
limited  to  one-third  of  "the  amount  by  which  such  actual  cost 
of  each  vessel  falls  short  of  the  estimated  cost  revised."  In 
that  case  the  fixed  profit  on  the  highest  cost  basis  of  10  per 
cent  of  the  estimate,  plus  a  premium  of  one-third  of  the 
economies  effected,  measured  the  possible  profits.  The  corre- 
sponding percentage  of  the  estimated  cost  in  the  emergency 
contract  work  of  the  War  Department's  Building  Construc- 
tion Division,  was  only  5  per  cent,  or  just  half  that  allowed  on 
the  construction  cost  of  the  oil  tank  steamers  as  awarded  by 
the  Bureau  of  Construction  and  Repairs  of  the  navy. 


CHAPTER   XIII 
Standard  Manufacturing  Cost-Plus  Contract  in  the  Navy 

Both  army  and  navy  authorities,  we  have  seen,  found  it 
advisable  to  resort  to  the  use  of  the  cost-plus  contract,  in 
meeting  extraordinary  conditions,  in  the  course  of  the  war. 
The  navy  was  fortunate  in  its  more  highly  developed  cost 
determining  facilities.  Owing  to  its  much  more  restricted 
range  of  building  and  manufacturing  operations  it  was  also 
in  much  better  position  to  exercise  accounting  supervision 
over  contracting  operations.  By  means  of  its  well  equipped 
commodity  sections  it  had  in  hand  most  that  was  needed  to 
keep  In  touch  with  market  changes,  price  levels  and  com- 
mercial conditions  generally.  The  navy's  experience  as  a  pur- 
chasing and  contracting  party  is,  therefore,  a  far  better  test 
of  the  advisability  or  Inadvisablllty  of  using  this  particular 
form  of  contract  than  In  the  case  of  the  army. 

The  navy's  cardinal  principle  of  cost  control  is  expressed 
in  a  single  sentence:  "The  accounting  organization  has  been 
imbued  with  the  Idea  that  a  way  must  always  be  found  to 
prevent  the  waste  of  the  government's  money  without  inter- 
fering with  the  expeditious  prosecution  of  the  work."^  This 
principle  had  its  chief  application  In  the  administration  of 
cost-plus  contracts.  Of  these  there  were  three  specific  forms 
in  use,  and  each  had  a  separate  administration  under  the 
existing  organization  of  the  department;  but  the  same  gen- 
eral methods  of  cost  control  by  the  Bureau  of  Supply  and 
Accounts  prevailed.  Operations  under  the  three  separate 
spheres  of  manufacturing,  of  shipbuilding  and  of  repairs 
were,  in  spite  of  the  usual  objections  to  this  form,  on  the 
whole  satisfactory. 2 

In  the  navy's  experience  in  manufacturing  during  the 
fiscal  year  of  191 8  the  outlay  for  such  products  as  guns,  air- 

^  Paymaster  General's  Report,  1918,  p.  92. 

2  Ihid.,  pp.  92-93.  , 

144 


WAR   CONTRACT   OPERATIONS  1 45 

planes,  forgings  and  special  supplies  under  this  type  of  con- 
tract amounted  to  $124,000,000;  its  shipbuilding  awards 
under  the  same  type  and  supervision  of  costs  were  $168,000,- 
000,  and  its  repair  contracts  $25,000,000.  All  of  this  expendi- 
ture of  $317,000,000  in  the  three  different  fields  of  industry 
under  a  uniform  system  of  cost  and  compensation  involved  an 
extensive  adjustment  of  accounting  methods  to  contracting 
practice  so  as  not  to  interfere  more  than  necessary  with  speed 
of  execution. 

Preventive  and  Stimulative  Effects  on 
Manufacturers 

What  the  naval  authorities  did  was  to  adopt  the  standard 
manufacturing  cost-plus  contract  and  adapt  it  to  their 
needs.  They  did  this  by  developing  and  strengthening  its 
provisions  on  lines  that  avoided  much  of  the  unfavorable 
results  criticised  in  practice  under  other  auspices.  To  begin 
with,  few  contracts  were  made  with  the  percentage  profit  to 
the  contractor.  The  lump  sum  profit  was  resorted  to  where- 
ever  practicable.  This,  however,  involved  no  change  in 
fundamentals,  because  even  the  lump  sum  had  to  be  calcu- 
lated on  a  percentage  of  the  estimated  cost  of  production. 
Had  the  plan  stopped  there  it  would  have  brought  little 
advantage  to  the  government  over  the  straight  percentage 
method  of  payment.  The  gain  came  in  supplementing  the 
provision  that  the  contractor  should  be  entitled  to  receive, 
in  addition  to  the  fixed  fee,  a  certain  proportion  of  the  sum 
by  which  he  succeeded  in  bringing  the  actual  cost  under  the 
estimated  cost.  That  proportion  varied  from  10  per  cent  to 
50  per  cent.  It  had  the  effect,  as  a  rule,  of  infusing  into  the 
manufacturer's  attitude  toward  the  job  an  effective  interest 
in  keeping  down  the  costs. 

Success  in  the  application  of  this  method  depended  fur- 
ther on  two  other  factors,  factors  in  which  the  camp  con- 
struction contracts  were  not  equally  equipped.  First  of  all, 
in  the  fidelity  and  intelligence  with  which  the  manufacturing 
concern  and  its  staff  cooperated  in  observing  the  standards 


146  GOVERNMENT   WAR   CONTRACTS 

agreed  upon  of  cost  and  compensation.  The  other  factor  is 
the  extent  to  which  the  government  itself  is  equipped  to  exer- 
cise control  over  costs  and  inspect  the  work  so  as  to  facilitate 
the  manufacturing  process  and  thus  insure  prompt  payments. 
The  first  of  these  provisions  is  preventive  of  waste.  The 
second  is  stimulative  of  effectiveness  on  the  part  of  the  manu- 
facturer. To  take  advantage  of  the  first,  more  latitude  in  the 
selection  of  the  contracting  concerns  is  desirable  than  can  be 
usually  gotten  under  the  competitive  method.  In  the  can- 
tonment contracts  and  in  the  ofificers'  training  camp  con- 
tracts this  advantage  was  gained  to  a  large  degree,  possibly 
larger  than  in  any  other  phase  of  the  government's  work  in 
the  war.  Business  honor,  patriotic  interest  and  other  motives 
enter  into  this  first  factor.  Where  the  navy's  mastery  of  the 
inspection  and  accounting  proved  to  be  such  as  to  relieve  the 
contractor  from  installing  and  maintaining  an  excessively 
expensive  accounting  organization,  the  effect  was  mutually 
advantageous.  Experience  has  shown  that  most  manufac- 
turers, under  this  plan  of  the  government's  cost-and-profit 
compensation  program,  found  it  "less  exacting  than  that  of 
the  systems  maintained  by  the  average  successful  business 
concern."^  Many  concerns  learned  much  to  their  advantage 
by  cooperating  with  the  standard  navy  schedule  of  cost 
control. 

Cost  and  Compensation  Provisions  in  Standard 

Contract 

A  summary  of  the  main  provisions  of  the  standard  manu- 
facturing cost-plus  agreement  will  serve  to  bring  out  the 
essential  features  as  it  applied  to  the  major  part  of  naval 
contracting  under  war  conditions.  The  defining  paragraph 
(first  below)  is  quoted  in  full,  as  follows: 

The  department  will  pay  the  contractors  a  profit  of  (percentage  of  cost  of 
product  or  stated  amount  per  unit)  completed  and  accepted  hereunder  and  also 
actual  cost  of  production,  defined  in  subparagraphs  (a)  to  (e)  below.  No  profit 
will  be  allowed  on  costs  under  subparagraph  (e).  On  such  manufacturing  work 
covered  by  this  contract  as  the  contractors  may  by  specific  authority  of  the  de- 

^  "Contractors'  Criticism  of  Cost-Plus,"  Paymaster  General's  Report,  1918,  p.  94. 


WAR  CONTRACT  OPERATIONS  1 47 

partment  procure  on  subcontracts,  the  profit  allowed  to  the  contractors  will  be 
one-half  of  the  above  stated  profit  if  the  above  stated  profit  is  a  percentage  on 
cost;  if  the  above  stated  profit  is  a  lump  sum,  the  profit  allowed  to  the  contractors, 
will  be  reduced  by  an  amount  equal  to  —  per  cent  of  the  invoice  cost  of  such  sub- 
contract work.     Cost  shall  include: 

(a)  Cost  of  all  direct  labor  definitely  ascertainable  as  necessary  for  and  em- 
ployed exclusively  in  the  manufacture  of  the  articles  contracted  for  hereunder. 

(b)  Cost  of  all  direct  material  definitely  ascertainable  as  necessary  for  and 
devoted  exclusively  to  the  articles  contracted  for  hereunder;  but  no  material 
shall  be  charged  direct  if  material  for  similar  purposes  is  charged  as  overhead 
expense  to  work  other  than  that  covered  by  this  contract.  The  cost  of  direct 
material  shall  be  the  net  cost  to  the  contractor,  i.e.,  invoice  cost  less  cash,  trade 
and  quantity  discounts,  plus  duty,  etc. 

(c)  A  proper  proportion  of  overhead  expenses.  By  the  term  "overhead 
expenses"  is  meant  the  indirect  labor  and  other  manufacturing  expenses  and  the 
general  and  administrative  expense  of  the  contractors.  It  does  not  include  inter- 
est, advertising,  etc. 

(d)  The  foregoing  items  of  cost  shall  apply  as  above  specified  to  all  labor,  direct 
or  indirect,  and  material  involved,  whether  the  same  be  actually  applied  to  prod- 
uct accepted  or  not  accepted,  provided  in  the  department's  judgment  the  con- 
tractor takes  due  precaution  to  prevent  carelessness  and  unnecessary  damage  to 
material. 

(e)  Cost  of  machinery  and  equipment,  patterns  and  drawings  and  temporary 
structures  needed  for  the  utilization  and  protection  thereof  acquired  for  and 
devoted  exclusively  to  navy  work;  subject  to  approval  in  advance.  Title  shall 
vest  in  the  department. ' 

There  are  certain  common  provisions  to  all  such  contract 
agreements,  of  which  mention  should  be  made  in  defining  the 
relations  and  obligations,  as  well  as  the  compensation.  For 
example,  as  in  the  standard  agreement,  it  is  specified  that — 

The  contractor  will  use  every  endeavor  to  perform  obligations  contracted  to 
the  satisfaction  of  the  department,  shall  obtain  materials  at  the  lowest  possible 
prices,  and  never  pay  higher  than  for  similar  materials  for  use  otherwise  at  the 
same  plant.  Nor  shall  higher  rates  of  pay  for  labor  be  allowed,  subject  to  piece 
work  contracting. 

Payments  shall  be  made  subject  to  the  inspection  and  acceptance  of  materials, 
equipment,  etc.,  on  the  basis  of  actual  expenditures,  and  in  monthly  instalments 
ten  days  after  submittal  of  bills  to  cover  the  approved  cost  for  the  previous  month. 
Special  disbursements  may  be  made  not  oftener  than  weekly. 

So  far  as  practicable,  the  contractors  shall  maintain  a  complete  separate  sys- 
tem of  accounts  for  government  work,  and  all  books  and  records  pertaining  to 
the  contract  shall  be  preserved  for  two  years  after  final  settlement.  All  orders, 
prices  and  awards  are  subject  to  the  approval  of  the  bureau  concerned  and  the 
Paymaster  General,  so  that  purchase  orders  upon  examination  may  be  held  sub- 
ject to  a  test  of  the  market  by  competitive  or  other  modes  of  revision. 

1  Annual  Report,  Paymaster  General  of  the  Navy,  1918,  pp,  94-96. 
11 


148  GOVERNMENT    WAR   CONTRACTS 

Cost-Plus  Contracts  in  Shipbuilding  and  Ship  Repairs 

Lea\'ing  manufacturing  contracts,  for  the  time  being,  what 
Avas  the  procedure  of  the  navy  in  the  two  other  important 
fields  of  public  contracting?  These  included  shipbuilding, 
and  ship  repairs. 

In  the  earlier  part  of  the  war  the  navy  was  able  to  make 
lump  sum  contracts  for  many  of  the  craft  required  for  its 
purposes.  But  the  unsettled  condition  of  the  market  for 
labor  and  materials  so  radically  affected  the  finances  of  some 
of  the  contracting  firms  as  to  make  an  adjustment  necessary 
in  favor  of  the  contractor.  Probably  the  experience  of  the 
Lake  Torpedo  Boat  Company  was  typical.  That  company 
had  contracts  on  a  fixed  basis.  "These  contracts,"  says  the 
company's  annual  report  for  191 8,  "were  taken  before  the 
war  conditions  had  caused  the  abnormal  increases  in  labor 
and  material  costs  which  were  entirely  unexpected  and  which 
could  not  have  been  foreseen.  Appropriations  made  by  Con- 
gress for  submarine  boats  were  limited  as  to  price  and  as  a 
consequence  this  company  suffered  under  the  abnormal  con- 
ditions as  did  all  shipbuilding  companies  that  had  fixed  price 
contracts  with  the  government,  which  directly  and  indi- 
rectly caused  increases  in  the  wage  scale.  On  some  of  these 
contracts,  the  government  has  already  made  partial  adjust- 
ments (February  6,  1919)  and  the  company  has  filed  claims 
covering  the  various  contracts  involved."^ 

When  the  fixed  price  contracts  were  completed  and  deliv- 
eries made,  It  was  impossible  to  induce  the  shipbuilding  firms 
to  enter  into  that  type  of  contract  again.  The  Lake  Com- 
pany consequently  contracted  for  the  next  four  boats  on  the 
cost  plus  percentage  basis  and  the  next  lot  of  eight  boats  fol- 
lowed on  the  cost  plus  a  fixed  sum  basis;  but  both  lots  were 
awarded  on  the  contingent  cost  and  profit  plan  of  compen- 
sation. This  individual  company's  experience  is  representa- 
tive of  the  government's  policy  of  beginning  with  the  peace 
time  plan  of  compensation,  being  forced  to  shift  sooner  or  later 
to  the  cost  plus  percentage  plan  and  finally  to  settle  on  the 

^President's  Annual  Report  to  Stockholders,  Meeting  February  6,  1919. 


WAR   CONTRACT   OPERATIONS  149 

plan  of  cost  plus  a  fixed  profit  per  ship.  The  builder  is  also 
allowed,  under  the  latter  form,  a  percentage  of  the  sum  saved 
in  reducing  the  actual  below  the  estimated  cost,  of  from 
25  to  50  per  cent  of  the  differential.  Furthermore,  in  some  of 
the  earlier  contracts,  a  lo  per  cent  profit  was  adjudged  fair. 
But  this  soon  proving  ultra-profitable,  was  in  later  contracts 
reduced  to  9  per  cent  and  in  some  of  the  latest  to  as  low  as 
7^  per  cent.  The  policy  was  not,  however,  the  product  of 
circumstances,  but  was  settled  upon  after  the  Compensation 
Board,  composed  of  representatives  of  the  four  main  bureaus 
of  the  navy,  had  made  a  costs  inquiry  at  the  beginning  of  the 
war.  ^ 

1  Paymaster  General's  Report,  1918,  pp.  102-103. 


CHAPTER   XIV 

Navy's  Procedure  to  Forestall  Profiteering 

How  to  get  away  from  market  conditions  made  abnormal 
by  war  demands  was  the  problem  with  which  all  departments 
of  the  government  struggled,  but  especially  so  the  army  and 
the  navy.  The  two  main  factors  in  the  contract  situation 
were  (i)  the  preponderance  of  quantities  demanded  as  com- 
pared with  the  available  supplies.  This  applied  to  commod- 
ities in  general,  but  particularly  to  staples  in  which  military 
needs  had  to  face  the  factor  of  speculative  control  of  large 
quantities.  (2)  The  failure  of  the  ordinary  methods  of  com- 
petiti\e  bidding  to  insure  limitations  on  the  tendencies  to 
advance  prices  to  profiteering  levels.  Where  these  conditions 
prevailed  they  forestalled  in  many  cases  the  reasonable  hope 
of  arriving  at  a  fair  and  just  price  by  the  ordinary  methods  of 
governmental  bargaining. 

The  four  methods  by  which  the  naval  authorities,  espe- 
cially the  Bureau  of  Supplies  and  Accounts,  obtained  the  most 
of  their  supplies  on  contract  account,  were  (a)  by  competitive 
bidding,  (b)  by  allocation,  (c)  by  cost-plus  contracts,  and  (d) 
by  commandeering. 

The  usual  competitive  procedure  was  adhered  to  wherever 
it  could  be  counted  upon  to  conform  to  the  standard  of  fair 
and  reasonable  prices.  Under  war  conditions  this  method 
had  its  limitations,  as  was  patent  in  the  efforts  to  obtain  raw 
materials  for  naval  uses. 

When  competition  did  not  achieve  its  purpose  [says  the  official  account]  one 
of  two  situations  usually  obtained:  The  supply  of  the  material  was  not 
sufficient  for  the  nation's  demands,  or  the  manufacturers  controlling  the  supply 
were  unwilling  to  furnish  the  material  at  prices  which  the  navy  ought  to  pay. 
.  .  .  When  material  had  to  be  obtained  under  these  conditions,  it  was  neces- 
sary to  resort  to  plans  ranging  all  the  way  from  mandatory  orders  to  patriotic 
appeal.  For  illustration,  it  was  frequently  unavoidable  that  the  market  on  the 
raw  material  entering  into  a  finished  product  would  be  inflated  if  competitive 
bids  on  the  finished  product  were  to  be  asked  in  due  course.     The  wider  the 

150 


WAR   CONTRACT   OPERATIONS  I5I 

competition  secured,  the  greater  the  demand  would  appear  to  be  for  the  raw 
material.  Every  concern  bidding  upon  the  finished  product,  in  case  it  did  not 
have  control  of  its  raw  material  at  the  time,  would  seek  to  cover  itself  upon  the 
raw  stock.  If  the  finished  product  asked  for  by  the  navy  required  10,000  pounds 
of  raw  material  and  there  were  twenty  bidders,  then  the  apparent  demand  for 
the  raw  material  would  total  200,000  pounds.  In  such  cases,  the  volume  of  the 
purchase  being  sufficiently  large  to  inflate  the  raw  material  market,  it  was  neces- 
sary to  meet  the  situation  either  by  price  fixing  upon  the  raw  material,  or  through 
a  purchase  by  the  navy  of  the  raw  material. ^ 

Price  Policy  in  Naval  Contracting 

Federal  law  having  defined  the  duty  of  competitive  con- 
tracting in  other  than  emergency  times,  the  navy  had  system- 
atically followed  that  method  for  a  series  of  prewar  years. 
As  a  consequence  it  had  not  only  developed  a  comprehensive 
body  of  experience  with  commercial  methods  but  had  also 
acquired  an  indispensable  acquaintance  with  the  qualities, 
classes  and  locations  of  material  through  its  well  organized 
material  sections.  On  this  basis  there  was  little  adjustment 
needed  to  adapt  its  contracting  machinery  to  the  extraordi- 
nary requirements  of  war.  There  were,  in  fact,  no  essential 
changes  in  principle.  An  almost  automatic  expansion  in 
personnel  of  the  purchasing  staff  resulted,  of  course.  Within 
a  year's  time  it  had  amplified  its  needs  in  this  respect  fourteen- 
fold  to  a  total  of  402  persons.  The  prewar  staff  all  told  in- 
cluded fewer  than  a  score  of  officers,  clerks,  stenographers  and 
civilian  experts.  These  had  attended  to  the  purchasing  of 
prewar  requisites  to  the  annual  value  of  $27,000,000.  From 
that  the  volume  of  purchases  rose  to  a  maximum  of  more 
than  $30,000,000  a  single  day  in  war  time.  Of  munitions 
alone  the  Bureau  of  Supplies  and  Accounts  purchased  more 
than  a  half  billion  dollars  worth  in  the  fiscal  year  ending 
June  30,  1918. 

The  price  policy  of  doing  so  large  a  volume  of  business 
on  public  account  in  so  creditable  a  manner  is  well  worth 
examining.  The  navy's  peace  time  purchasing  policy  of  open 
opportunity,  established  standards  of  quality  and  complete 
publicity  to   protect   large   and   small   alike,    had   naturally 

1  Annual  Report,  Paymaster  General  of  the  Navy,  1918,  p.  20-21. 


152  GOVERNMENT   WAR   CONTRACTS 

begotten  the  confidence  of  the  commercial  community. 
The  main  reason,  therefore,  was  that  it  was  based  on  sound 
and  defensible  grounds.  In  adjusting  itself  to  changes  in 
industry  under  war  conditions,  it  had  no  occasion  to  depart 
from  the  position  of  insisting  on  the  principle  of  paying  "a 
price  based  on  cost  and  a  reasonable  profit  added  thereto."^ 
In  comparatively  few  cases,  however,  it  was  found  necessary 
to  resort  to  the  war  time  power  of  compelling  performance  at 
a  price  which  the  navy  had  determined  to  be  fair  and  just.^ 
This  involved  the  recognized  responsibility  of  price  fixing 
when  those  quoted  were  not  deemed  just  and  fair.  In  this 
respect  the  policy  ran  counter,  and  wisely  so,  to  that  of  the 
Council  of  National  Defense.  In  the  War  Department  con- 
tracts, under  the  council's  guidance,  trade  organization  com- 
mittees and  subcommittees  passed  upon  the  prices  of  the  very 
commodities  which  they  controlled  commercially  and  which 
they  at  the  same  time  recommended  as  fair  and  just  to  the 
contracting  officers  of  the  government.  In  due  time,  how- 
ever, the  navy's  policy,  which  was  rooted  in  commercially 
sound  prewar  practice,  won  out  in  the  reorganization  of  the 
War  Department's  methods.  The  method  of  depending  in  the 
hour  of  emergency  on  outside  aid  lost  caste.  The  war  estab- 
lishment had  failed  in  peace  times  to  develop  its  several  bu- 
reaus in  too  many  cases,  with  the  exception  of  the  Engineer 
Corps,  among  others,  on  the  side  of  their  commercial  relations. 
Consequently,  in  the  contracting  crisis  which  followed  the 
outbreak  of  war,  the  army  authorities  took  refuge  in  methods 
admitting  of  profiteering  in  contrast  with  the  navy,  following 
in  the  main  the  policy  of  competitive  bargaining  in  the  open 
market.  In  due  time  this  fact  came  to  be  recognized  in 
official  circles  in  the  army  as  well.  This  was  the  purport  of 
the  War  Industries  Board's  acknowledgment,  the  board 
which  ultimately  had  most  to  do  with  army  contracting,  that 
"manufacturers  waste  their  time  to  attempt  to  extort  unfair 
prices  from  the  navy,  as  it  seems  to  keep  itself  exceptionally 

^  Paymaster  General's  Report,  1918,  p.  3. 
^Ibid.,  p.  32. 


WAR  CONTRACT  OPERATIONS  1 53 

well  informed,  and  uses,  as  it  should,  its  mandatory  orders 
and  commandeering  privileges  to  secure  fair  prices."^ 

Within  some  commercial  circles,  on  the  other  hand,  there 
was  rather  less  readiness  to  accept  this  principle  of  cost  as 
the  prime  factor  in  price  determination  for  governmental 
contracting.  Some  essential  industries  had  apparently  as- 
sumed the  attitude  that  cost  accounting  was  a  game  at  which 
they  alone  were  entitled  to  play,  instead  of  an  administrative 
principle  of  which  the  government  above  all  others  should  be 
master  in  war  times  as  well  as  in  peace.  It  seems  to  have  been 
assumed  that  when  a  nation  passed  into  the  war  status  the 
ordinary  principles  of  both  economics  and  commercial  morals 
were  shelved,  making  of  the  government  an  easy  mark  of  the 
freebooting  contractor  while  pickings  were  good.  Fortunately, 
this  was  not  long  in  being  overcome  by  the  strong  patriotic 
attitude  of  commercial  circles  in  the  main.  A  saner  and  more 
far  sighted  attitude  was  not  slow  in  getting  sway  throughout 
the  ranks  of  industrial  and  mercantile  concerns.  This  was 
instanced  in  the  response  of  the  Ford  Company  of  Detroit  in 
undertaking  to  construct  the  submarine  patrol  boats  known 
as  "Eagles."-  It  should  be  noted,  however,  that  "in  the  pur- 
chasing of  manufactured  goods  there  appeared  to  be  a  far 
greater  willingness  to  base  their  prices  upon  cost  of  production 
plus  a  reasonable  profit,"  than  among  the  producers  of  raw 
materials.  To  quote  Admiral  IMcGowan's  analysis  of  the 
bureau's  experience: 

The  producers  of  raw  materials  apparently  believed  that  they  were  entitled  to 
the  market  price  regardless  of  the  relation  of  that  market  price  to  the  cost  of  pro- 
duction in  even  the  high  cost  or  inefficient  concern.  They  were  frequently  ready 
to  capitalize  the  war  demands  to  their  benefit.  They  were  often  unwilling  to 
consider  that  there  might  be  a  true  or  normal  market  value  having  a  relation  to 
the  cost  of  production. 3 

1  Annual  Report,  Paymaster  General  of  the  Navy,  1918,  p.  32. 

-Navy  Department,  Report  of  the  Chief  of  Construction  and  Repairs,  1918, 
p.  II. 

2  Paymaster  General's  Report,  1918,  p.  21. 


154  GO\TERNMENT   WAR   CONTRACTS 

Supply  Bureau's  Methods  of  Perpetuating 

Competition 

That  many  war  contracts  were  the  source  of  enormous 
profits  in  mining,  manufacturing  and  merchandising  was 
apparent  at  every  stage  of  the  war.  That  occurred  in  spite  of 
efforts  at  price  control  through  special  methods.  Probably 
the  traditional  viewpoint  of  the  majority  of  those  who  adhered 
to  the  principle  of  public  exploitation  was  to  get  all  that  the 
market  would  stand.  Especially  when  the  market  was  as 
large  as  the  public  treasury,  the  disposition  was  too  generally 
to  follow  the  economically  short  sighted  impulse  to  go  to  the 
limit  in  marking  up  prices.  With  such  a  class  of  contractors,  to 
assume  that  patriotism,  unenforced  by  some  workable  stand- 
ard of  fairness,  could  be  relied  upon  to  temper  ordinary  greed 
and  avarice  to  any  considerable  extent,  was  to  lean  on  a  broken 
reed.  Consequently,  to  keep  prices  on  a  rational  basis  and 
safeguard  the  public  interest  from  unbridled  profiteering, 
special  effort  was  made  to  keep  alive  competitive  purchasing 
as  long  as  possible.  This  had  also  the  effect  of  restricting  the 
more  unusual  of  contract  arrangements  to  a  comparatively 
limited  class  and  scope  of  cases  and  commodities. 

Ordinarily,  the  method  of  newspaper  advertising  and  cir- 
culation of  printed  schedules  was  relied  upon  by  the  Bureau 
of  Supplies  and  Accounts  to  secure  wide  and  open  rivalry 
among  bidders.  But  under  changed  conditions  that  plan 
had  to  be  modified.  Two  adjustments  followed.  By  one  the 
work  of  purchasing  was  divided  into  local  and  central,  so 
that  the  navy  yards  might  buy  locally  for  more  immediate 
supply  of  commodities  which  did  not  enter  into  the  large  scale 
supply  program.  Thereby  the  central  service  at  Washington 
was  left  free  to  develop  its  own  organization  to  meet  the 
special  problems  of  effective  bargaining.  It  did  this  by 
adapting  its  staff  to  the  expanding  demands  of  the  volume 
and  variety  of  the  paymaster's  purchases. 

In  emergency  bargaining,  time  is  of  prime  importance. 
How  to  expedite  bidding  thus  became  a  practical  problem. 
To  accelerate  responses  the  central  purchasing  unit  at  head- 


WAR   CONTRACT    OPERATIONS  155 

quarters  adopted  two  methods.  To  get  forms  Into  the  hands 
of  prospective  bidders  In  the  shortest  practicable  time  they 
were  mimeographed  on  the  day  on  which  the  bureau  received 
the  requisitions.  By  means  of  stenciled  malHng  lists  previ- 
ously prepared  this  was  done  with  remarkable  expedltlousness. 
The  special  section  created  for  this  work,  consisting  of  stencil 
cutters,  mimeographers,  proofreaders,  assemblers  and  six 
other  trained  classes  of  workers,  on  a  single  day  turned  out 
74,000  sheets  of  mimeographed  matter.  To  these  rush  sched- 
ules replies  by  mall  had  to  be  In  hand  within  a  comparatively 
short  limit  of  time.  That  method  reduced  the  peace  time 
margin  between  announcement  and  signing  of  contracts  to  a 
fraction  of  former  lapses.  The  other  method  was  still  more 
expeditious.  By  It  the  more  urgent  needs  were  transmitted 
by  telegraph  or  telephone  and  acceptances  received  at  head- 
quarters. Thus  much  of  the  emergency  supplies  were  con- 
tracted for  quite  as  quickly  at  Washington  as  If  they  had  been 
placed  locally.  And  the  plan  had  the  added  advantage  of 
central  information  as  to  market  conditions,  prices  and  con- 
tracting practicabilities.  Competitive  control  was  thereby 
projected  into  situations  where  less  persistence  might  have 
surrendered  the  contracting  functions  of  the  government  to 
less  vigilant  bargaining  agencies,  if  not  to  the  tender  mercies 
of  the  harpies  of  private  avarice. 

How  well  equipped  the  Paymaster's  Office  was  for  this  most 
responsible  of  business  functions,  and  how  closely  it  cooperated 
with  other  price  safeguarding  facilities  of  the  government  are 
apparent  from  the  following  official  description  of  actual  pro- 
cedure In  the  handling  of  bids: 

When  the  bids  received  in  the  regular  openings  were  first  analyzed,  the  written 
recommendation  of  the  commodity  specialist  was  made  as  to  whether  or  not  the 
prices  quoted  were  just.  If  these  prices  were  not  considered  just,  then  the  bids 
were  rejected,  a  navy  order  issued  and  the  work  of  determining  a  just  price  ensued. 
All  possible  means  of  securing  authoritative  cost  data  have  been  employed.  The 
contractor  was  requested  to  submit  his  own  cost  figures  sworn  to  and  certified; 
the  opinions  of  the  material  bureau  concerned  and  of  the  commodity  section  of 
the  War  Industries  Board  were  noted;  a  navy  accounting  officer  was  ordered  to 
the  plant  to  report  on  the  cost  of  manufacture;  frequently  the  Federal  Trade 
Commission  was  requested  to  investigate  and  furnish  cost  data  applying  to  the 


156  GOVERNMENT   WAR   CONTRACTS 

industry  as  a  whole.  The  data  regarding  cost  determination  was  so  arranged  as 
to  be  available  for  use  as  the  need  recurred  and  the  gathering  of  cost  data  was  so 
systematized  as  to  avoid  duplication  of  effort  through  separate  cost  investigations 
by  different  branches  of  the  government  service.^ 

Even  where  competitive  procedure  had  reached  its  Hmits 
the  Paymaster's  Office  was  by  no  means  disposed  to  allow  the 
government  with  tied  hands  to  fall  victim  to  the  contracting 
practice  of  setting  "what  the  traffic  would  bear."  The  fore- 
going description  of  methods  disclosed  the  fact  that  there 
were  other  methods  of  preventing  the  public  interest  from 
exploitation  under  the  guise  of  alleged  "prevailing  prices." 
The  insistent  adherence  to  the  cost-plus-fair-profit  standard, 
supported  by  well  informed  cost  accounting  inquiries  put  the 
manufacturing  and  mercantile  concerns  in  the  position  of 
having  to  make  out  their  own  cases  and  justify  their  claims 
of  inability  to  meet  the  governmental  standard.  That  often 
had  the  effect  of  exposing  their  inefficiency  and  ignorance 
of  the  costs  of  their  own  processes  or  of  bringing  into  light  the 
wide  margin  of  profits  on  which  they  were  operating  for  com- 
mercial account.  Even  the  fear  of  the  war  excess  profits 
tax  was  not  wholly  lost  on  the  contracting  mind  in  this 
dilemma. 

Transition  to  Allocation  of  Contracts 

Allocation  of  contracts  was  at  times  resorted  to  when  com- 
petitive placing  of  contracts  or  orders  failed  to  meet  the  navy's 
supply  demands  at  reasonable  prices.  It  involved  govern- 
mental dealings  with  the  trade  regarded  as  a  unit  of  productive 
capacity.  Knowing  exactly  what  the  capacity  of  a  given 
class  of  mills  collectively  and  individually  was  for  the  product 
in  question,  and  also  being  informed  as  to  the  state  of  orders 
both  governmental  and  commercial  on  hand,  the  authorities 
could  not  easily  be  misled  as  to  the  ability  of  the  manufac- 
turers to  handle  the  governmental  requirements.  This  issue 
came  to  a  head  in  the  case  of  the  heavy  demands  for  canvas 
and  duck  in  the  fall  of  1917.     Prices  in  the  market  were  then 

^Paymaster  General's  Report,  1918,  pp.  32-33. 


WAR   CONTRACT   OPERATIONS  157 

at  abnormal  levels.  Manufacturers,  busy  at  orders  for  com- 
mercial account,  took  the  usually  offish  attitude  of  being 
unwilling  to  bid.  Whereupon  the  navy  requested  the  War 
Industries  Board,  then  still  an  adjunct  of  the  council,  to 
supply  it  with  a  list  of  mills  from  which  an  adequate  quantity 
of  these  staples  could  be  expected  within  a  reasonably  short 
time.  Then,  without  hesitation,  mandatory  orders  were 
issued  at  "a  provisional  price  at  the  figure  which  appeared 
just  on  the  basis  of  all  available  data  in  the  hands  of  the 
navy."^  Not  a  few  of  the  concerns  entrusted  with  these 
orders  took  the  position  in  their  replies  that  the  quantity  of 
work  demanded  could  not  be  done.  To  check  up  the  alle- 
gations of  this  sort  the  naval  authorities  promptly  referred 
these  claims  to  the  War  Industries  Board  in  whose  files  the 
information  as  to  capacity  of  every  factory  was  a  matter  of 
record.  That  resolved  the  situation  into  one  of  settling  the 
price  without  delaying  production,  which  price  the  manu- 
facturers claimed  was  unreasonably  low.  Then  the  navy, 
calling  for  a  show  of  hands,  requested  facts  and  cost  figures, 
at  the  same  time  assuring  the  mills  of  a  fair  profit  over  manu- 
facturing costs.  At  this  challenge  the  opposition  collapsed 
and  the  price  was  adjusted,  not  at  40  cents  a  yard,  which  the 
manufacturers  wanted,  but  at  34  cents  based  on  a  cost-plus- 
profit  rate  of  compensation.  Later  these  mills  requested 
that  the  mandatory  order,  to  which  some  sense  of  stigma  was 
thought  to  belong,  be  displaced  for  a  voluntary  contract  at 
the  price  imposed  by  the  navy. 

Comparative  Extent  of  Allocation  and  Competition 

Allocation  of  war  orders  or  contracts  arises  also  when  an 
unexpected  shortage  of  supplies  becomes  imminent  at  atime 
when  industries  concerned  are  booked  too  far  ahead  to  meet 
the  emergency  in  the  quantity  and  at  prices  offered.j*  To 
dissolve  this  apparent  deadlock  the  industry  as  a  whole  is 
taken  into  council.  Its  membership  is  organized  into  a 
functioning   unit   "for  a  more  coordinate  handling  of  war 

1  Paymaster  General's  Report,  1918,  p.  33. 


158  GOVERNMENT   WAR   CONTRACTS 

demands."  On  a  better  mutual  acquaintance  with  condi- 
tions the  government's  pressing  requirements  are  thus  allo- 
cated among  them  on  the  basis  of  actual  or  potential  capacity. 
Such  references  have  numerous  advantages  besides  the  main 
effect  of  promptly  assigning  the  work  to  be  done.  One  such 
"by-product"  is  the  better  understanding  of  the  viewpoints 
by  contractor  and  government.  A  second  is  the  appreciation 
of  the  general  welfare  as  a  basic  asset  in  economic  oppor- 
tunity. A  third  is  the  discovery  of  the  as  yet  latent  resources 
of  an  industry  in  which  individual  action  in  isolated  fashion 
gives  place  to  collective  enterprise  in  the  public  interest  in  a 
national  crisis.  Allocation  has,  in  not  a  few  cases,  if  not 
always,  unfolded  the  secret  of  something  in  industry  more 
precious  than  pecuniary  profits. 

Purchases  under  allocation  as  contrasted  with  competition 
have  included  a  smaller  number  of  different  commodities. 
Out  of  an  aggregate  of  fifty-seven  different  kinds  of  com- 
modities bought  by  the  paymaster  of  the  navy  in  1918, 
twenty-two  of  them  were  secured  by  allocation  and  thirty- 
five  by  competitive  bidding.  These  included  food  products 
alone.  A  typical  case  of  allocating  a  contract  occurred  in  the 
purchase  of  canned  foods.  The  Food  Purchasing  Board, 
composed  of  representatives  of  the  navy,  the  army,  the  Food 
Administration  and  the  Federal  Trade  Commission,  in  No- 
vember, 191 7,  at  once  found  demands  in  excess  of  supply  and 
prices  abnormally  high  in  the  midst  of  a  strong  speculative 
situation.  Although  the  orders  distributed  among  the  can- 
ning organization  were  not  at  competitive  prices,  they  were 
not  based  on  abnormal  market  conditions,  but  on  the  cost  of 
production,  in  the  finding  of  which  figure  the  Federal  Trade 
Commission  rendered  inestimable  services  to  both  the  navy 
and  the  army  alike. 


CHAPTER   XV 

Standard  Contracts  Adjusted  to  Changed  Conditions 

In  all  other  bureaus  of  the  navy,  especially  those  of  Ord- 
nance, Construction  and  Repairs,  and  Yards  and  Docks,  the 
standard  forms  of  contracts  found  quite  general  use  during 
the  war.  That  meant  that  the  fixed  price  types  of  peace  were 
adjusted  to  changed  conditions,  instead  of  resorting  to  the 
cost-plus  form  of  award.  This  did  not  apply  to  ship  construc- 
tion after  the  earlier  stages  of  the  war.  Owing  largely  to  the 
unsettled  conditions  of  the  wage  schedules  and  price  levels, 
the  lump  sum  plan  of  compensation  was  found  unworkable. 
We  recall  that  the  Lake  Torpedo  Boat  Company,  which  took 
contracts  at  first  on  the  fixed  price  basis,  when  these  boats 
were  completed  found  it  necessary  to  change  to  the  cost  plus 
percentage  rate  for  the  next  four  boats  and  to  the  cost  plus  a 
fixed  sum  for  the  next  eight.  One  of  the  Delaware  River  com- 
panies which  took  a  prewar  contract  for  a  battleship,  but  had 
not  finished  until  some  months  after  the  European  War 
began,  lost  some  millions  of  dollars  on  its  contract.  On  the 
other  hand,  the  Navy  Bureau  of  Yards  and  Docks,  whose 
contracting  was  most  extensive,  had  no  serious  difficulty  in 
getting  much  of  its  construction  work  done  on  the  lump  sum 
basis,  under  one  of  its  standard  peace  time  contracts  adapted 
to  war  conditions. 

Features  of  Standard  Yards  and  Docks  Contract 

How  a  war  time  contract  is  adapted  may  best  be  shown  by 
some  analysis  of  the  features  of  the  agreement  which  naval 
experience  has  developed  in  its  dealings  with  the  contracting 
world.  Take,  for  instance,  the  award  for  the  construction  of 
the  submarine  base,  power  house  and  machine  shop  at  New 
London.  The  project  had  nothing  about  it  out  of  the  ordinary, 
at  least  nothing  that  required  departure  from  the  standard 

159 


l60  GOVERNMENT   WAR   CONTRACTS 

form  of  agreement  with  adjustments  for  labor  and  other 
variable  elements  of  expense.  In  this  respect  it  was  favored 
by  the  situation  among  contracting  trades.  Building  of  public 
utility  projects,  in  municipal  and  maritime  engineering  and 
similar  lines,  happened  to  be  at  a  standstill.  It  was  easy 
enough  under  these  circumstances  to  adhere  to  the  competi- 
tive form  of  award.  There  were  plenty  of  good  concerns  glad 
to  get  such  a  job  on  terms  that  would  enable  them  to  keep 
their  organization  intact  and  come  out  financially  even  on 
government  work.  This  particular  navy  yard  contract  at 
New  London  is  a  good  example  of  the  standard  peace  time 
form  on  a  lump  sum  basis  adapted  to  war  conditions.  It  illus- 
trates the  two  elements  of  retaining  the  established  framework 
while  introducing  factors  of  elasticity  to  meet  changed 
conditions. 

The  essential  features  of  this  contract  as  evolved  by  ex- 
perience are  three  in  number.  The  entire  documentary  mass 
may  be  brought  into  clearer  relief  by  grouping  its  provisions 
under  the  following  heads : 

(i)  The  Covenant  and  Agreement. 

(2)  Plans  and  Specifications,  including  drawings  and  blue- 
prints, and  the  General  Provisions  comprising  thirty-one 
conditions. 

(3)  Adjustments  and  Changes,  owing  to  unusual  conditions. 
The  Covenant  and  Agreement  is  really  a  summary  of  the 

results  of  the  negotiations  as  the  successful  bidder  and  the 
government  have  agreed  upon  and  have  put  them  in  writing. 
Without  this  written  record  the  contract,  as  we  have  already 
seen,  is  not  valid.  This  part  of  the  document,  under  which 
the  precuniary  commitments  are  outlined,  specifies  the  par- 
ties to  the  contract,  describes  the  project  in  general  terms  and 
refers  to  the  specifications  and  other  provisions  and  condi- 
tions by  name,  number  and  section  or  otherwise.  It  also 
indicates  the  schedule  or  period  of  delivery  within  which  the 
work  is  to  be  done  (150  days);  states  that  the  lump  sum  of 
$171,000  is  the  price  of  the  work,  that  the  contract  is  not 
transferable  and  that  no  member  of  Congress  or  officer  of  the 


WAR  CONTRACT   OPERATIONS  l6l 

navy  has  any  beneficial  interest  in  the  contract.  Finally — 
and  this  is  where  the  adjustment  of  the  standard  form  to  war 
conditions  begins — the  two  special  clauses  relating  to  price 
fluctuation  and  to  the  adjustment  of  wages  are  embodied  as 
necessary  to  protect  both  parties  to  the  agreement  against 
the  exigencies  of  the  labor  and  the  material  markets.  Effect- 
ive only  during  the  war  was  another  typical  provision,  namely, 
that  of  providing  by  the  contractor  at  government  expense 
additional  watchmen  for  the  protection  of  the  plant  and  prop- 
erty "against  espionage,  acts  of  war  and  of  alien  enemies." 
This  was  necessitated  by  the  enemy's  policy  of  carrying  the 
war,  by  sabotage,  dynamiting  and  otherwise,  into  the  work- 
shop of  its  antagonists.  This  recurs  in  practically  every  war 
time  contract  after  the  earlier  stages  of  the  war. 

Government  Continues  to  Carry  the  War 

Hazards 

Both  in  protecting  the  building  or  manufacturing  processes 
against  enemy  dangers,  and  in  the  insurance  of  the  contract- 
ing party  against  losses  by  fluctuations  in  prices  and  wages, 
the  government  finds  it  necessary  to  assume  the  risks.  The 
theory,  as  some  have  expressed  it,  is  that  as  war  conditions 
are  responsible  for  the  liability  to  changes  in  the  supply  of  and 
command  over  man  power  and  materials,  therefore,  it  is  but 
fair  and  just  that  the  war  making  power,  the  government, 
should  bear  the  hazards  of  the  economic  undertakings  neces- 
sary to  its  military  and  naval  operations.  Transportation 
was  one  main  source  of  uncertainty  in  industry,  owing  to  war 
priorities.  As  the  military  establishment  expanded  from  an 
army  of  500,000  to  one  of  5,000,000  in  the  course  of  little  more 
than  a  year,  the  demands  for  materials  and  means  of  trans- 
port, for  manufacturing  and  administrative  talent,  expanded 
concurrently.  The  Increases  In  wages  In  part  at  least  had  to 
be  assumed  by  the  government.  As  the  government  assumed 
control  of  raw  materials,  it  could  put  them  at  the  service  of 
contracting  manufacturers  at  a  lower  price  than  the  con- 
tractor could  get  them  In  the  open  market. 


1 62  GOVERNMENT   WAR    CONTRACTS 

These  two  conditions  affecting  war  time  costs  gave  rise  to 
two  special  clauses  in  the  contract  under  discussion.  They 
ran  as  follows: 

Price  Adjustment  Clause. — It  is  agreed  and  understood  that  the  party  of  the 
second  part  reserves  the  right  to  modify  the  compensation  to  be  paid  under  this 
contract  in  such  manner  as  to  obtain  a  credit,  based  on  the  difference  between 
the  quotations  on  construction  materials  obtained  by  the  party  of  the  first  part 
at  the  time  of  the  preparation  of  the  proposal  for  work  covered  by  this  contract, 
and  the  quotations  that  may  be  obtained  on  such  materials  by  the  party  of  the 
second  part.^ 

Adjustment  of  Wages  Clause. — If,  after  the  date  of  the  contract,  there  shall  be 
any  increase  in  the  rates  of  wages  prevailing  in  the  vicinity  of  the  place  where 
work  contemplated  by  the  contract  is  done  that  shall  necessitate  payment  by 
the  contractor,  on  account  of  labor  employed  exclusively  on  such  work,  of  rates 
of  wages  in  excess  of  those  prevailing  in  such  vicinity  at  the  date  of  the  contract, 
he  shall  receive  additional  compensation  in  the  sum  equal  to  one-half  the  amount 
of  the  increase  in  the  rates  of  wages  so  required  to  be  paid  by  him  over  the  rates 
prevailing  at  the  date  of  the  contract.- 

In  both  of  these  provisions  the  government  protects  itself 
against  the  contractor  running  up  excessive  increments  of 
cost.  In  the  price  adjustment  the  government  may  be  the 
source  of  supply  of  materials  and  a  controlling  factor  in  the 
market  on  which  the  contractor  has  to  depend.  If  there  be 
any  advantage  in  this,  the  government  is  by  these  terms  en- 
titled to  it,  in  the  form  of  a  credit  against  the  lump  sum  of 
$171,000.  In  the  wage  adjustment  the  government,  again, 
protects  itself  by  assuming  to  reimburse  the  contractor  by 
only  half  of  any  advance  he  may  have  made,  and  the  con- 
tractor has  to  make  his  case  good  to  the  employing  Bureau 
of  Yards  and  Docks,  which  is  the  final  arbiter.  There  is  also 
some  advantage  to  the  government  in  the  practice  of  deferring 
all  such  adjustment  of  wages  until  the  completion  of  the 
contract. 

Specifications  and  Provisions  in  Standard  Contracts 

War  contracts  as  a  field  of  enterprise  and  investment  have, 
as  a  second  feature,  highly  important  technical  and  adminis- 

' Contract  for  constructing  submarine  base  at  New  London,  Specification  No. 
2626,  fifth  paragraph,  under  Appropriation  No.  287,  from  copy  of  contract  in 
Returns  Office,  Interior  Department,  Washington.     Department  No.  1143. 

^Addendum  No.  i,  to  the  General  Provisions,  Bureau  of  Yards  and  Docks, 
Navy  Department,  November  3,  1917. 


WAR    CONTRACT   OPERATIONS  1 63 

trative  aspects.  One  finds  these  embodied  in  the  specifica- 
tions and  provisions,  both  general  and  special.  A  study  of 
the  navy  contract  provisions,  in  yard  and  dock  building,  for 
instance,  impresses  one  with  the  wide  range  of  market  com- 
mand, of  business  relations  which  enter  into  this  branch  of 
business,  and  with  the  complexity  of  duties  involved  in  con- 
tract undertakings.  These  are  in  a  topical  way  illustrated 
by  the  following  list  of  the  New  London  Submarine  Base 
Specifications,  Provisions  and  Instructions  forming  integral 
parts  of  the  contract: 

1.  Specifications  No.  2626,  including  drawings,  blueprints, 
etc. 

2.  General  Provisions,  of  31  paragraphs,  for  public  works, 
March  20,  191 7. 

3.  Special  Provisions,  paragraphs  2  to  184  inclusive,  dated 
October  3,  1917. 

4.  Addendum  No.   i  to  General  Provisions,  on  wage  ad- 
justment, etc. 

5.  Instructions  relative  to  factory  inspection  of  machinery 
and  materials. 

6.  Standard  specifications  as  mentioned  In  paragraph  16 
of  No.  I. 

These  several  contractual  documents  together  comprise 
several  hundred  paragraphs,  each  one  of  which  covers  some 
economic  relation  of  sufficient  significance  to  require  special 
statement.  To  get  the  government's  viewpoint  one  must 
examine  the  214  topics  given  in  the  General  and  the  Special 
Provisions  which  this  bureau  issues  to  bidders.  In  the  main 
these  also  define  the  rights  and  duties  of  the  contractor.  It 
is  not  within  the  limits  of  this  inquiry  to  even  enumerate  these 
topics  defining  the  arrangements  between  government  and 
contractor.  But  a  few  may  be  singled  out  to  give  specific 
content  to  the  discussion.  Such,  for  instance,  are  the  fol- 
lowing : 

Control  of  Work. — The  government,  by  its  officer  in  charge,  shall  at  all  times 

exercise  full  supervision  and  general  direction  of  all  work  under  the  contract  so 

far  as  it  affects  the  interests  of  the  government,  and  all  questions,  disputes  or 

differences  as  to  any  part  or  detail  thereof  shall  be  decided  by  such  officer  in 

12 


164  GOVERNMENT   WAR    CONTRACTS 

charge,  subject  to  appeal,  provided  that  it  shall  be  distinctly  understood  that  the 
■supervision  and  general  direction  of  all  work  under  the  contract  by  the  officer  in 
charge  shall  not  relieve  the  contractor  of  responsibility  for  the  full  protection  of 
and  responsibility  for  his  work,  both  as  regards  sufficiency  and  time  of  execution. 

In  most  contracts  bidders  are  required  to  specify  in  their 
bids  the  number  of  days  deemed  necessary  with  their  organi- 
zation to  complete  the  work.  Within  these  Hmits  of  time  the 
schedule  of  progress  of  work  is  to  be  made  up  "showing  ap- 
proximately the  dates  on  which  each  part  of  the  work  is 
expected  to  be  begun  and  finished"  (General  Provisions, 
section  15).  Closely  connected  with  this  program  of  progress 
is  the  vital  matter  of  the  cancelation  of  contract  for  failure  to 
advance  rapidly  enough  or  for  other  causes.  The  govern- 
ment holds  this  contingency  in  its  own  hands  in  all  of  its 
dealings  with  private  interests.  The  theory  of  the  para- 
mountcy  of  the  public  interest  is  well  exemplified  in  the  fol- 
lowing Provision  No.  16,  under — 

Annulment  of  Contract. — If  at  any  time  the  progress  of  the  work  shall  have 
been  such  as  to  show  that  the  work  can  not  be  completed  within  the  time  allowed, 
or  should  any  provision  of  the  contract  be  violated  by  the  contractor,  the  Chief  of 
the  Bureau  of  Yards  and  Docks,  may,  if  in  his  opinion  the  interests  of  the  gov- 
ernment demand  it,  declare  the  contract  null  and  void  without  prejudice  to  the 
right  of  the  government  to  recover  for  the  default  therein  or  violations  thereof. 
Should  the  contract  be  declared  null  and  void,  the  contractor  agrees  that  the 
government  may  hold  all  material  delivered  and  work  done  under  the  contract 
and  all  machinery,  tools,  appliances  and  accessories  upon  the  site  of  the  work  or 
used  in  connection  therewith  pending  the  completion  of  the  work  covered  by  the 
■contract  unless  allowed  or  directed  to  remove  them  in  whole  or  in  part. 

Closely  connected  with  this  feature  of  the  contract  is  the 
matter  of  liquidated  damages  for  delay.  This  takes  the  form 
of  a  deduction  from  the  contract  price  of  a  definite  sum  for 
each  and  every  calendar  day  of  failure  to  deliver  on  schedule 
time.  These  damages  are  taken  as  the  measure  of  injury  to 
the  interests  of  the  government  from  such  delays  and  of  course 
the  liability  acts  as  a  deterring  influence  against  tolerating 
any  of  the  conditions  that  might  retard  the  progress  on  the 
work. 

It  is  evident  that  in  dealing  with  the  navy,  as  well  as  with 
most  other   divisions   of   the   government,    the   contractor's 


WAR  CONTRACT  OPERATIONS  1 65 

responsibility  is  of  no  ordinary  character.  The  provisions  of 
the  time  Hmit,  of  damages  for  delay  and  of  the  possible  ouster 
from  the  work  are  not  mere  verbal  specifications.  In  the 
standard  type  of  contract  the  contractor  also  assumes  the 
risks  of  the  operations  of  the  work,  although  in  the  cost-plus 
plan  of  award  the  hazards  of  compensation  are  assumed  by  the 
government.  In  the  Bureau  of  Yards  and  Docks  the  pre- 
vailing rule  is  thus  stated : 

Contractor's  Responsibility. — The  contractor  shall  be  responsible  for  the  entire 
work  contemplated  by  the  contract  and  every  part  thereof  and  for  all  tools,  appli- 
ances and  property  of  every  description  used  in  connection  therewith.  All  meth- 
ods of  work,  tools,  appliances  and  auxiliaries  of  all  descriptions  shall  be  safe  and 
sufficient,  and  if  found  by  the  officer  in  charge  not  to  be  so,  shall  be  made  satis- 
factory by  the  contractor  without  delay.  The  contractor  shall  specifically  and 
distinctly  assume  all  risks  connected  with  the  work,  and  shall  be  held  liable  for 
all  damage  or  injury  to  property  used  or  persons  employed  on  or  in  connection 
with  the  work  and  all  damage  or  injury  to  any  person  or  property,  wherever 
located,  resulting  from  any  action  or  operation  under  the  contract  or  in  connec- 
tion with  the  work. 

This  provision  opens  the  way  to  consider  the  large  subject 
of  industrial  compensation  for  injuries  to  employes — a  sub- 
ject with  which  the  contractor  has  much  to  do  in  the  hazard- 
ous undertakings  peculiar  to  the  field  of  dock  building  and 
shipyard  work.  This  is,  however,  too  large  a  theme  to  ven- 
ture upon  here.  It  is  enough  to  point  out  that  the  policy  of 
the  government,  as  here  illustrated,  is  still  not  to  assume  these 
hazards  but  to  place  them  on  the  contractor's  side  of  the  bar- 
gain, to  figure  them  into  his  items  of  expense  in  making  his 
estimates  as  part  of  his  lump  sum  bid.  It  is  thus  made  clear 
whose  business  it  is  to  provide  for  this  element  of  costs. 

Changes  in  Plans  and  Specifications  and  Delays 

Probably  no  single  feature  of  the  government  contract, 
whether  in  times  of  peace  or  of  war,  has  done  more  to  deter 
honorable  firms  from  competing  than  that  of  the  changes  in 
plans  and  specifications  after  the  award  and  in  the  course  of 
the  work.  The  government's  attitude  on  this  question  is,  in 
the  view  of  many,  the  result  of  an  exaggerated  sense  of  pre- 
caution against  getting  an  obsolete  product.     The  insistence 


1 66  GOVERNMENT   WAR   CONTRACTS 

on  changes  is  certainly  among  the  most  vexatious  of  relations 
between  the  two  parties  to  the  contract.  The  real  reasons  for 
the  practice  have  never  been  fully  brought  out ;  but  whatever 
may  be  the  explanation  for  this  feature  in  government 
contracting  as  compared  with  commercial  contracting,  it  is 
always  expensive;  probably  it  is  rarely  as  necessary  as  is 
ofiticially  considered;  and  never  is  it  to  the  liking  of  the  con- 
tractor, except  in  cost  plus  percentage  contracts,  if  at  all. 
At  any  rate  it  is  certain  that  the  public  loses  millions  thereby. 
The  form  in  which  changes  have  usually  been  handled 
depends  on  the  amount  involved.  They  often  necessitate 
the  drawing  up  of  a  supplementary  contract,  especially  if 
the  amount  of  cost  is  above  a  certain  minimum.  This  may 
in  effect  amount  to  rewriting  the  contract  in  the  government's 
terms.  In  this  navy  yard  contract  the  subject  was  covered 
by  the  following  paragraph  in  the  General  Provisions  forming 
part  of  Specifications  No.  2626: 

ly.  Changes. — The  government  reserves  the  right  to  make  such  changes  in  the 
contract,  plans  and  specifications  as  may  be  deemed  necessary  or  advisable,  and 
the  contractor  agrees  to  proceed  with  such  changes  as  directed  in  writing  by  the 
Chief  of  the  Bureau  of  Yards  and  Docks.  The  cost  of  said  changes  shall  be  esti- 
mated by  the  officer  in  charge,  and,  if  less  than  S500,  shall  be  ascertained  by  him. 
If  the  cost  of  said  changes  is  $500  or  more,  as  estimated  by  the  officer  in  charge, 
the  same  shall  be  ascertained  by  a  board  of  not  less  than  three  officers  or  other 
representatives  of  the  government.  The  cost  of  the  changes  as  ascertained  above, 
when  approved  by  the  Chief  of  the  Bureau  of  Yards  and  Docks,  shall  be  added  to 
or  deducted  from  the  contract  price,  and  the  contractor  agrees  and  consents  that 
the  contract  price  thus  increased  or  decreased  shall  be  accepted  in  full  satisfaction 
for  all  work  done  under  the  contract:  Provided,  That  the  increased  price  shall  be 
the  estimated  actual  cost  to  the  contractor  at  the  time  of  such  estimate  and  that 
the  decreased  cost  shall  be  the  actual  or  market  value  at  the  time  the  contract 
was  made,  both  plus  a  profit  of  10  per  cent. 

In  this  particular  contract  the  changes  at  the  New  London 
yard  were  responsible  for  the  addition  of  45  days  to  the  agreed 
170  in  which  the  contract  was  originally  to  be  completed. 
In  point  of  time  consumed  that  was  an  extension  of  nearly 
one- third.  Part  of  this  was  due  to  severe  winter  weather. 
In  point  of  cost,  the  changes  added  $24,431  to  the  govern- 
ment's bill  or  over  14  per  cent. 

The  subject  of  changes  in  plans  and  specifications  is  more 


WAR  CONTRACT  OPERATIONS  1 67 

or  less  closely  related  to  that  of  Inspection.  The  rule  is  that 
if  the  removing  or  tearing  out  of  work,  upon  inspection,  is  due 
to  the  fault  of  the  contractor,  the  expense  is  to  be  borne  by 
him;  if  otherwise,  then  it  is  the  rule  to  allow  the  contractor  the 
actual  cost  of  the  examination  plus  lo  per  cent,  with  suitable 
extension  of  time.  This  Inspection  applies  to  material  as 
well  as  to  workmanship,  and  is  the  government's  method  of 
assuring  the  quality  of  the  work  required  to  meet  its  needs. 
It  follows  the  lines  of  the  prime  contract  back  into  the  sub- 
contracting factory,  shop  or  field  in  all  its  ramifications.  In 
time  of  war  when  increased  numbers  of  competent  inspectors 
are  required  for  technical  service,  reliance  has  been  found  by 
the  navy  in  the  civilian  assistance  drawn  from  the  technical 
professions  and  industrial  life.  It  was  from  this  reserve  that 
the  Ordnance  Bureau  of  the  navy  drew  to  expand  its  inspect- 
ing force  from  94  officers  and  civilians  in  March,  1917,  to 
1,193  in  July,  1918.  Of  these  500  were  enlisted  men  and  558 
civilians.  This  was  done  without  in  any  w4se  impairing  the 
high  degree  of  efficiency  for  which  the  navy's  Ordnance 
Bureau  has  an  established  reputation.^ 

Naval  methods  of  inspection  have  been  criticized  from  the 
standpoint  of  their  effects  on  the  progress  of  the  work. 
Delays  in  the  contract  are  classed  as  avoidable  and  unavoid- 
able. The  avoidable  delays  are  such  as  delays  In  securing 
materials,  by  rejection  of  materials  on  inspection,  changes  in 
market  conditions  or  checking  drawings,  etc.  Unavoidable 
delays  are  such  as  are  caused  by  acts  of  the  government,  acts 
of  Providence,  inevitable  accidents,  conditions  of  weather  or 
the  tides,  Interfering  strikes  of  labor,  and  other  causes  beyond 
the  control  of  the  contractor.  Only  for  the  latter  will  he  be 
exempt  from  damages. 

It  is  not  always  the  case  that  allowances  for  unavoidable 
delays  such  as  are  caused  by  the  government  really  cover  the 
losses  to  the  contractor.  Inspection  is  not  always  so  prompt 
as  it  should  be.     Even  though  the  contractor  does  get  10 

^Annual  Report,  Chief  of  Bureau  of  Ordnance,  to  Secretary  of  Xavv,  1918,  pp. 
4-5- 


1 68  GOVERNMENT   WAR   CONTRACTS 

per  cent  of  the  cost  borne  by  the  government  for  inspection 
delays,  that  compensation  may  be  only  a  tithe  of  the  loss 
from  prolonging  the  government  contract  which  preoccupies 
the  plant  and  staff  until  it  is  out  of  sight.  This  is  really  often 
the  case  in  ship  construction.  Delay  in  inspection  means 
postponement  of  acceptance  or  rejection,  or  modification. 
It  postpones  the  inauguration  of  other  contracts,  by  occupying 
the  shipways.  Some  of  the  wooden  shipbuilders  complained 
bitterly  against  this  kind  of  treatment  on  the  part  of  the 
Emergency  Fleet  Corporation.  In  naval  work  a  common 
complaint  is  that  changes  in  more  or  less  unimportant  mat- 
ters of  detail  too  often  hold  back  the  progress  of  work.  Such 
a  view  was  entertained  no  doubt  in  the  following  paragraph 
from  the  annual  report  of  the  Lake  Torpedo  Boat  Company 
of  Bridgeport:^ 

Another  source  of  delay  has  been  the  large  number  of  changes  in  details  of  con- 
struction ordered  from  time  to  time  by  the  Navy  Department.  These  changes 
have  resulted  in  many  cases  in  tearing  down  work  already  completed  and  rebuild- 
ing in  another  way.  The  Navy  Department  has  naturally  watched  developments 
in  connection  with  war  conditions  and  has  desired  to  keep  the  submarines  under 
construction  up  to  date  in  all  respects;  but  while  it  has  paid  for  the  actual  work  of 
making  the  changes,  the  extra  work  involved  has  retarded  progress  to  an  appre- 
ciable extent. 

Thus  the  only  shipyard  in  the  country  devoted  exclusively 
to  the  construction  of  submarine  boats  had  its  productivity 
materially  reduced  by  delays  due  to  changes  in  course  of 
construction.  Not  even  the  exigencies  of  war  time  emergency, 
when  demands  for  speed  were  at  their  highest,  was  sufficient 
to  exorcise  the  evil  spirit  of  delays  due  to  changes  in  plans. 


Annual  Report  to  Stockholders,  February  6,  1919,  Augusta,  Maine. 


CHAPTER   XVI 

War  Contracts  of  the  United  States  Shipping  Board 

Among  the  major  fields  of  war  contracting,  the  operations 
of  the  United  States  Shipping  Board,  primarily  through  its 
Emergency  Fleet  Corporation,  occupy  a  position  next  in 
importance  to  the  War  Department  in  point  of  outlay. 
Appropriations  for  the  military  establishment  alone  of  the 
War  Department  for  the  fiscal  year  ending  June  30,  1918, 
were  a  total  of  $5,666,729,650.89,^  The  corresponding  ap- 
propriation for  the  navy  was  $1,684,560,754.60.2  Compared 
with  these  vast  amounts  is  the  net  available  authorization  for 
the  building  program  of  the  United  States  Shipping  Board's 
Emergency  Fleet  Corporation,  as  of  December  31,  19 18,  a 
sum  of  $3,284,337,500.3  This  figure  includes  not  only  the 
amount  of  $2,769,337,500  authorized  for  ship  construction 
under  these  auspices,  but  also  the  amount  of  $515,000,000  to 
pay  for  the  requisitioned  shipping  tonnage  commandeered 
by  the  United  States  in  the  private  shipbuilding  yards  of  the 
country.  Thus  it  appears  that  the  Shipping  Board's  fleet 
construction  contracting  called  for  an  outlay  of  more  than 
twice  the  size  of  the  entire  appropriation  for  the  navy,  with 
which  the  Shipping  Board  was  more  or  less  closely  associated 
in  the  prosecution  of  the  war. 

Wide  Extent  of  the  Board's  Contracting  Powers 

A  brief  resume  of  the  statutory  position  of  the  Shipping 
Board  will  suffice  to  indicate  the  wide  scope  of  its  contracting 
authority.     The  Shipping  Act  of  191 6  established  the  United 

1  Annual  Report,  Secretary  of  War,  1918,  p.  115. 

2  Annual  Report,  Secretary  of  the  Navy,  1918,  p.  364. 

^Sundry  Civil  Bill,  1920:  Hearings,  House  Committee  on  Appropriations, 
65th  Cong.,  3d  Sess.,  Part  HI,  United  States  Shipping  Board.  Testimony  of 
Charles  Piez,  Vice  President,  Emergency  Fleet  Corporation,  on  status  of  building 
program  as  of  February  4,  1919,  compared  with  that  of  December  31,  1918,  pp. 
4,  25.     Washington,  Government  Printing  Office. 

169 


170  GOVERNMENT   WAR   CONTRACTS 

States  Shipping  Board  for  the  two  main  objects  of  (a)  en- 
couraging, developing  and  creating  a  naval  auxiliary  and  naval 
reserve  and  a  merchant  marine  to  meet  the  requirements  of 
the  commerce  of  the  United  States  with  its  territories  and 
possessions  and  with  foreign  countries;  and  (b)  to  regulate 
carriers  by  water  engaged  in  the  foreign  and  interstate  com- 
merce of  the  country.  This  act,  approved  September  7, 
1916,1  was,  therefore,  a  declaration  of  plans  and  policy  of  the 
United  States  in  the  position  of  a  neutral  entering  upon  the 
third  year  of  the  World  War.  During  that  belligerent  period 
it  had  come  to  be  clear  that  the  United  States  had  virtually 
been  made  the  shipyard  for  the  warring  powers,  so  far  as  the 
Allied  nations  were  concerned. 

This  situation  gradually  drew  into  the  service  of  the  En- 
tente nations  practically  all  the  available  shipping  tonnage. 
That  left  the  United  States  with  a  totally  inadequate  supply 
of  ships  with  which  to  serve  the  markets  of  neutral  peoples  now 
dependent  upon  this  country  for  import  and  export  service. 
For  want  of  ships  cotton  in  the  earlier  part  of  the  war  had 
been  sold  as  low  as  five  cents  a  pound.  The  whole  nation 
was  besought  to  come  to  the  relief  of  the  situation  in  which 
its  most  splendid  opportunity  in  foreign  trade  had  been 
made  of  little  avail  for  the  mere  want  of  merchant  ships. 
Under  these  conditions  the  old  opposition  of  the  private  ship- 
ping interests,  against  the  government  going  into  the  business 
of  private  enterprise,  receded  to  the  background.  Now,  less 
than  ever,  it  was  argued,  would  private  capital  go  into  the 
task  of  building  a  merchant  marine.  More  convincing  was 
the  plea  that  an  effective  navy  might  in  a  crisis  even  fail  of 
its  defensive  service  if  inadequate  shipping  tonnage  under  the 
national  flag  in  the  merchant  marine  were  not  available  as  a 
naval  auxiliary.  It  is,  therefore,  rather  from  this  point  of 
departure,  of  the  necessity  of  a  naval  auxiliary  in  the  present 
state  of  the  world's  dependence  on  maritime  facilities  for 
trade,  that  the  newer  policy  of  the  government  going  into  the 

^39  U.  S.  Statutes  at  Large,  728,  729.     Also  First  Annual  Report  of  Shipping 
Board,  19 17,  p.  6. 


WAR  CONTRACT  OPERATIONS  1 71 

business  of  shipbuilding  and  operating  appealed  to  the  popular 
imagination  as  well  as  to  the  private  shipowning  purse.  We 
must  not,  it  was  argued  by  growers  of  agriculture  surpluses 
as  by  the  exporter  and  importer  alike,  and  by  the  manufac- 
turer, suffer  ourselves  to  remain  in  the  position  of  dependence 
on  the  tonnage  of  other  nationalities  to  sell  our  surpluses,  be 
they  agricultural,  mineral  or  industrial.  For  the  first  time 
the  growers  of  grain  and  cotton  saw  sea  power  in  a  new  and 
significant  light. 

The  manufacturing  and  mercantile  opinion,  after  two  full 
years  of  enormous  profits  in  sales  to  England,  France  and 
Russia  in  the  form  of  lucrative  war  contracts,  was  easily  con- 
vinced that  it  mattered  little  whether  private  or  public  funds 
made  ships ;  only  so  that  they  were  made  and  put  at  the  service 
of  foreign  trade  in  which  fortunes  were  being  made  in  a  single 
chartering  every  day  in  the  year.  Meanwhile  the  most  un- 
foreseen changes  had  taken  place  among  the  commercial 
powers  of  the  world.  Chief  of  these  changes  was  that  of  the 
United  States  passing  from  a  debtor  to  a  creditor  nation  among 
the  financial  powers.  The  opportunity  was  irresistible. 
Let  the  government  build  ships  for  immediate  needs  and  leave 
the  matter  of  maritime  policy  to  be  settled  later  by  special 
commission  or  by  Congress. 

The  actual  purpose  of  the  original  Shipping  Act  was  to 
turn  over  to  a  special  commission  the  problem  of  threshing 
out  the  question  of  policy  and  to  decide  on  a  plan  for  the 
"national  emergency  arising  from  the  insufficiency  of  mari- 
time tonnage  to  carry  the  products  of  the  farms,  forests, 
mines  and  manufacturing  industries  of  the  United  States  to 
their  consumers  abroad  and  within."^  During  the  next  six 
eventful  months  the  members  of  the  Shipping  Board  had 
elaborated  a  program  which  took  the  form  of  the  Emergency 
Fleet  Corporation,  to  which  the  President  delegated  his  war 
time  powers  of  the  act  of  June  15,  1917.^  That  act  embodied 
the  contractual  program  of  the  board.     It  constituted  one 

^  Proclamation  by  the  President,  February  5,  191 7. 
^  First  Annual  Report,  U.  S.  Shipping  Board,  p.  7. 


172  GOVERNMENT    WAR    CONTRACTS 

of  the  most  comprehensive  schemes  of  governmental  ship- 
building ever  undertaken  by  any  nation.  So  large  was  it  that 
at  its  widest  expansion  its  officers  had  committed  the  country 
to  construction  contracts  of  3,1 16  ships  of  deadweight  tonnage 
of  16,913,047  tons.^  That  was  not  far  from  one-third  of  the 
entire  tonnage  of  the  maritime  nations  of  the  world,  according 
to  Lloyd's  Register,  for  the  shipping  year  immediately  preced- 
ing the  war. 

Scope  of  the  Emergency  Fleet  Corporation's 

Contracting 

The  connection,  as  a  matter  of  statutory  authority,  between 
the  Shipping  Act  creating  the  board  and  the  Emergency 
Shipping  Act  empowering  the  President  to  order  ships,  is 
made  clear  by  sections  5  and  11  of  the  former  act.  These 
provisions  are  as  follows : 

That  the  board,  with  the  approval  of  the  President,  is  authorized  to  have 
constructed  and  equipped  in  American  shipyards  and  navy  yards  or  elsewhere, 
giving  preference,  other  things  being  equal,  to  domestic  yards,  or  to  purchase, 
lease,  or  charter,  vessels  suitable,  as  far  as  the  commercial  requirements  of  the 
marine  trade  of  the  United  States  may  permit,  for  use  as  naval  auxiliaries  or 
army  transports,  or  for  other  naval  or  military  purposes,  and  to  make  necessary 
repairs  on  and  alterations  of  such  vessels.^ 

Section  II.  That  the  board,  if  in  its  judgment  such  action  is  necessary  to  carry 
out  the  purposes  of  this  act,  may  form  under  the  laws  of  the  District  of  Columbia 
one  or  more  corporations  for  the  purchase,  construction,  equipment,  lease,  charter, 
maintenance,  and  operation  of  merchant  vessels  in  the  commerce  of  the  United 
States.     The  total  capital  stock  thereof  shall  not  exceed  $50,000,000. 

Authority  to  construct  ships  under  these  two  sections  was 
broad  and  general,  but  it  laid  the  basis  for  the  contractual 
operations  contemplated  in  the  Emergency  Shipping  Act. 
That  enactment,  which  became  law  sixty  days  after  our 
declaration  of  war  with  the  German  Empire,  centered  extra- 
ordinary powers  even  for  war  time  in  the  President.  Prob- 
ably no  other  board  or  commission  ever  had  so  broad  a 
power  of  contracting  control  over  any  industry  as  is  embodied 
in  the  following  provisions,^  authorizing  the  chief  executive — 

1  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  pp.  loo-ioi. 
^  U.  S.  Shipping  Act,  sec.  5. 

^Emergency  Shipping  Fund  Provision  in  Urgency  Deficiencies  Appropriations 
Act,  June  15,  1917.     (Public,  No.  233,  65th  Cong.) 


WAR  CONTRACT  OPERATIONS  1 73 

Section  i. — (a)  To  place  an  order  with  any  person  for  such  ships  or  material  as 
the  necessities  of  the  government  to  be  determined  by  the  President,  may  require 
during  the  period  of  the  war. 

(b)  To  modify,  suspend,  cancel  or  requisition  any  existing  or  future  contracts 
for  the  building,  production  or  purchase  of  ships  or  material. 

(c)  To  require  the  owner  or  occupier  of  any  plant  in  which  ships  or  materials 
are  built  or  produced  to  place  at  the  disposal  of  the  United  States  the  whole  or 
any  part  of  the  output  of  such  plant,  to  deliver  such  output  or  part  thereof  in 
such  quantities  and  at  such  times  as  may  be  specified  in  the  order. 

(d)  To  acquire,  construct,  establish  or  extend  any  plant,  and  in  pursuance 
thereof,  to  purchase,  requisition,  or  otherwise  acquire  title  to  or  use  of  land  im- 
proved or  unimproved  or  interest  therein. 

(e)  To  purchase,  requisition  or  take  over  the  titles  to  or  the  possession  of,  for 
use  or  operation  by  the  United  States,  any  ship  now  constructed  or  in  the  process 
of  construction. 

(f)  To  take  possession  of,  lease  or  assume  control  of,  or  to  extend,  improve  or 
increase,  or  cause  to  be  extended,  improved  or  increased  any  street  railroad, 
interurban  railroad  .  .  .  necessary  for  the  transfer  and  transportation  of 
employes  of  shipyards  or  plants  engaged  in  the  construction  of  ships  or  equipment 
therefor. 

(g)  In  pursuance  of  the  foregoing  powers,  or  any  of  them,  to  make  advance 
payments  or  loans  of  such  amounts  and  upon  such  terms  as  the  President  may 
deem  necessary  and  proper. 

Section  2. — Compliance  with  all  orders  issued  hereunder  shall  be  obligatory  on 
any  person  to  whom  such  order  is  given  and  such  order  shall  take  precedence  over 
all  other  orders  and  contracts. 

Section  3. — Whenever  the  United  States  shall  cancel,  modify,  suspend  or  requisi- 
tion any  contract,  make  use  of,  assume,  occupy,  requisition,  acquire  or  take  over 
any  plant  or  part  thereof,  or  any  ship,  charter  or  material,  in  accordance  with  the 
provisions  hereof,  it  shall  make  just  compensation  therefor,  to  be  determined  by 
the  President;  and  in  case  of  dissent  at  the  award,  to  pay  75  per  cent  of  the 
amount  thus  provisionally  determined,  the  remainder  to  be  ascertained  by  judicial 
procedure. 

Section  ^.— The  President  may  exercise  the  power  and  authority  hereby  vested 
in  him,  and  expend  the  money  herein  and  hereafter  appropriated  through  such 
agency  or  agencies  as  he  shall  determine  from  time  to  time.  .  .  .  All  ships 
constructed,  purchased  or  requisitioned  under  authority  herein  or  heretofore  or 
hereafter  acquired  by  the  United  States,  shall  be  managed,  operated  and  disposed 
of  as  the  President  may  direct. 

One  step  further  and  the  government's  shipping  program 
became  a  full  fledged  going  concern  in  the  field  of  its  specialty. 
That  step  was  the  transfer  by  the  President,  as  section  4  had 
empowered  him,  of  his  enormous  authority  to  any  agency  he 
might  designate.  By  Executive  Order  of  July  11,  1917,  he 
designated  the  Shipping  Board  and  the  Emergency  Fleet 
Corporation  to  exercise  these  powers  and  to  put  the  program 


174  GOVERNMENT   WAR   CONTRACTS 

into  effect.  The  same  act  appropriated  (June  15,  191 7)  not 
to  exceed  $250,000,000  for  the  purchase  and  requisitioning  of 
"ships  now  constructed  or  in  the  course  of  construction," 
acquiring  plants,  materials,  charters,  etc.;  $150,000,000  for 
ships  turned  over  to  the  army  and  navy;  obligating  the 
expenditure  of  $250,000,000  for  new  construction,  and  limit- 
ing the  authorized  construction  program  to  $500,000,000.^ 
This  was  no  ordinary  contractual  program. 

Construction  Problems  of  the  Fleet  Corporation 

In  the  execution  of  this  vast  grant  of  powers  the  transition 
from  the  peace  to  the  war  status  had  a  radical  effect  on  the 
speed  in  building  operations  of  the  Shipping  Board.  In 
peace  its  duties  were  to  promote  a  merchant  marine  and  regu- 
late shipping.  For  that  purpose  it  was  provided  that  a  sep- 
arate corporation  should  be  organized  both  for  construction 
and  operation  of  shipping.  This  had  the  advantage  of  "plac- 
ing on  a  comparative  equality  with  private  shipping  vessels 
operated  under  government  appropriations,"  both  in  com- 
mercial practice  and  with  respect  to  the  position  of  this  ship- 
ping under  international  law.  The  power  under  the  Emer- 
gency Fleet  Corporation  Act  to  operate  ships  was  thus  greatly 
restricte'd,  but  the  power  to  construct  ships  was  "limited 
only  by  the  measure  of  the  appropriations." ^  The  results  in 
construction  were  such  that  between  the  date  of  organization 
of  the  board,  January  30,  and  October  31,  191 7,  in  a  period  of 
nine  months,  during  six  of  which  the  corporation  was  in  opera- 
tion, the  latter  was  supervising  in  116  shipyards  the  building 
of  1,118  vessels  and  disbursing  in  this  contractual  program  in 
excess  of  a  billion  dollars  a  year.  Our  entering  the  war  had 
given  an  emergency  character  to  the  need  of  meeting  ship- 
ping problems;  but  it  had  done  more — it  had  transferred  the 
shipbuilding  and  operating  project  from  an  ordinary  admin- 
istrative machinery  of  the  government  into  an  instrument  of 
newly  delegated  powers  in  the  hands  of  the  commander-in- 

^  Emergency  Shipping  Act,  sees.  11-12.     Approved  June  15,  1917. 
2  First  Annual  Report,  U.  S.  Shipping  Board,  pp.  6-7. 


WAR   CONTRACT   OPERATIONS  1 75 

chief  of  the  war,  to  whom  the  Shipping  Board  and  its  Emer- 
gency Corporation  were  alone  responsible,  as  the  agent  of  the 
President. 

An  analysis  of  the  situation  in  the  American  shipping 
industry  at  this  time  discloses  the  conditions  by  which  the 
board  and  the  corporation  had  to  be  guided.  In  that  period 
of  time  between  the  outbreak  of  the  European  War  and  the 
entrance  of  the  United  States,  an  interval  of  two  years  and 
seven  months,  the  shipping  nations  of  Europe  and  Asia  had 
come  to  this  country  with  urgent  orders  for  tonnage.  Ocean 
freight  rates  rose  to  fortune  making  heights  within  the 
first  year  of  the  war.^  Every  way  in  our  shipyards  was  thus 
not  only  occupied  with  valuable  orders  for  the  time  being, 
but  increased  facilities  were  being  installed  as  fast  as  possible. 
Even  with  this  the  American  shipyards  were  committed  to 
construction  contracts,  mainly  to  British  and  Norwegian 
owners,  as  well  as  to  domestic  and  Japanese  companies,  for  a 
period  in  some  cases  of  two  years  ahead.  As  the  emergency 
became  more  acute  and  the  chance  of  our  becoming  involved 
in  war  with  Germany  more  probable,  the  attitude  of  the 
government  toward  private  construction  for  foreign  account 
became  more  restrictive.  For  example,  tentative  negotia- 
tions for  an  order  for  lOO  vessels  at  an  average  cost  of 
$1,000,000  each,  pending  during  the  time  of  the  Balfour 
Mission  to  the  United  States  and  practically  concluded  sub- 
ject to  the  approval  of  the  State  Department,  were  disap- 
proved with  a  rebuke  in  view  of  the  threatening  outlook. 

These  and  other  conditions  gave  to  the  Fleet  Corporation's 
contracting  problem  a  fourfold  character.  These  lines  in- 
cluded: 

(i)  The  building  of  entirely  new  yards  where  more  ships 
might  be  built. 

(2)  The  construction  of  wooden  ships  under  contract  con- 
ditions which  would  not  interfere  with  the  main  burden  of 
the  program  for  the  production  of  steel  ships.     This  part  of 

1  First  Annual  Report,  U.  S.  Shipping  Board,  p.  13. 


176  GOVERNMENT   WAR   CONTRACTS 

the  problem  was  supplementary  to  the  steel  ship  program 
and  not  in  any  sense  antagonistic.^ 

(3)  To  unify  and  speed  up  pending  contracts  in  private 
yards  by  requisitioning  all  steel  construction  of  over  2,500 
ton  deadweight  capacity. 

(4)  To  standardize  designs  and  place  direct  contracts  for 
steel  construction  as  the  major  part  of  the  corporation's 
efforts  to  solve  the  problem  of  the  national  and  international 
shipping  emergency. 

Of  these  four  concurrent  tasks  the  first  and  the  fourth  were 
of  course  the  more  vital.  It  was  estimated  that  from  6,000,000 
to  10,000,000  deadweight  tons  would  be  needed  to  carry 
troops  and  supplies  to  Europe  and  to  make  good  the  drain  of 
the  submarine  ravages,  with  any  sort  of  a  safe  margin.  But 
our  best  shipbuilding  year  had  yielded  only  300,000  tons,  in 
1 916,  under  the  highest  possible  inducements  in  the  earning 
power  of  shipping.  Wooden  ship  construction,  by  which 
much  more  might  have  been  accomplished,  if  the  construction 
had  been  confined  to  localities  and  firms  accustomed  to  such 
work,  proved  disappointing.  That  was  due  to  divided 
council,  cancelations  and  a  wavering  policy  generally.  Nor 
could  the  domestic  facilities  be  relied  on  for  any  vast  expan- 
sion of  tonnage,  because  out  of  the  142  ways  in  the  steel  ship- 
yards when  we  entered  the  war,  70  per  cent  were  building 
craft  for  the  navy.  That  narrowed  down  the  Fleet  Corpora- 
tion's task  to  the  building  of  additional  ways  at  existing  plants 
and  creating  new  yards  for  production  on  a  large  enough 
scale  to  meet  the  menace  threatening  the  world. 

Tonnage  Contracted  for  to  October  31,  191 8 

Progress  made  in  the  awards  of  contracts  for  the  different 
types  of  vessels  and  the  corresponding  tonnage  at  different 
dates  of  the  war  period  is  shown  in  the  subjoined  table  com- 
piled from  ofificial  sources: 

'  Testimony  of  William  Denman,  Senate  Committee  on  Commerce,  Hearings  on 
Shipping  Board,  65th  Cong.,  2d  Sess.,  Vol.  I,  pp.  1095-1097. 


WAR   CONTRACT    OPERATIONS  1 77 

NUMBER  AND  TONNAGE  OF  CONTRACTS  PLACED  FOR  VESSELS 
OF  DIFFERENT  TYPES  AT  DIFFERENT  DATES  i 

August  J,  igi7  October  31,  IQ17  October  31,  igi8 

Types  of  Vessels     Vessels   Tonnage  Vessels      Tonnage  Vessels    Tonnage 

Wood 235        840,900  375         1,330,900  840      2,602,000" 

Steel 70        587,000  305        2,283,000  493      3,374,616 

Composite 58         207,000  58           207,000  32         116,000 

Total 363      1,634,900  738        3,820,900  1,365      6,092,616 

Requisitioned 413         2,937,808  121      1,013,661 

Grand  total. .  .     363       1,634,900       1,151        6,758,708  1,491      7,106,277 

»  As  of  August  31,  1918. 

These  totals  indicate  that  within  less  than  four  months 
after  declaring  war  the  Fleet  Corporation  had  363  vessels 
under  contract,  whose  tonnage  was  1,634,900  tons  deadweight. 
The  better  record  of  the  next  three  months,  of  1,151  vessels 
under  contract  with  a  total  of  6,758,908  tons,  included  413 
vessels  requisitioned  in  private  yards,  of  2,987,808  tons. 
That  was  not  far  from  half  of  the  entire  tonnage  under  con- 
tract, at  the  date  of  almost  seven  months  from  the  outbreak  of 
war.  A  year  later,  on  October  31,  191 8,  when  the  construc- 
tion program  was  at  its  highest,  there  were  1,491  vessels  build- 
ing for  the  corporation,  of  7,106,277  tons.  Of  these,  assum- 
ing that  requisitioned  ships  were  all  of  steel,  the  steel  tonnage 
comprised  60  per  cent  of  the  total. 

The  achievements  of  the  steel  shipbuilding  task  have  to  be 
judged  by  the  results  up  to  this  latter  date  of  October  31, 
1 91 8 — eleven  days  before  the  armistice  which  suspended  hos- 
tilities. A  summary  of  activities  in  this  particular  form  of 
construction,  grouped  by  the  ten  contracting  districts,  shows 
the  number  of  vessels  delivered,  under  construction  and  unde- 
livered at  that  date.  It  will  serve  to  give  a  sort  of  bird's-eye 
view  of  the  steel  ship  situation  shortly  before  the  policy  of 
cancelation  of  contracts  was  inaugurated  by  the  suspension 
of  hostilities.  Such  a  summary  follows  herewith,  illustrat- 
ing the  wide  geographical  and  industrial  scope  of  the  Fleet 
Corporation's  operations  in  the  most  expanded  stage  of  its 
development : 

*  U.  S.  Shipping  Board,  First  Annual  Report,  p.  8;  Second  Annual  Report,  pp. 
137.141- 


178  GOVERNMENT   WAR    CONTRACTS 

CONSTRUCTION  ACTIVITIES  AND  DELIVERIES  BY  DISTRICTS  AS 

OF  OCTOBER  31,  1918  1 

Location  of      No.  of  No.  of       Deliveries  Under  Contract  Undelivered 

Office            Yards  Ways  No.     Tonnage    No.       Tonnage  No.  Tonnage 

Boston,  Mass.       4         18       10        112,250     18          i37,ioo  41          369,600 

New  York  City       9         47       13          78,200     85          592,925  270  1,354,580 

5         26       20        164,885     25          216,275  94         733,305 

3         17       II            75,500  50         397,700 

7  36       6           46,000  56         355,800 

II         57       42        396,000     61          554.030  179  1,707,300 

9         50       89        736,394     57          481,100  194  1,680,200 

17         97     159        539,470     95         368,300  279  1,116,550 

8  42       44       325,602     51          417,711  81          700,706 


Baltimore . 
Jacksonville  . 
New  Orleans. 
San  Francisco 

Seattle 

Cleveland.  .  . 
Philadelphia . 


Total 73      390    377    2,352,801409      2,888,460      1,244      8,415,741 

The  relative  importance  of  ship  contracting  in  the  scope  of 
the  Emergency  Fleet's  expenditures  and  commitments  is 
apparent  from  the  financial  statement  of  operations  as  of 
October  15,  191 8.  According  to  this  recapitulation  the  total 
authorizations  made  to  that  date  were  $3,671,000,000.  The 
corporation,  in  its  plans  of  expansion  of  building  facilities,  its 
requisitioning  of  ships  and  its  work  of  housing  and  transport- 
ing its  working  forces  to  and  from  the  yards,  had  committed 
itself  to  the  extent  of  $3,446,679,414,  of  w^hich  $2,681,963,071 
w^as  for  contract  ships.  How  large  a  part  of  this  total  com- 
mitment was  in  process  of  production  is  revealed  by  the  figure 
of  actual  expenditures  of  $1,041,806,923.  In  other  words, 
the  outstanding  obligations,  compared  with  the  completed 
work  turned  over  to  the  corporation,  were  twice  or  more  in 
value  of  the  undelivered  work  contracted  for  within  less  than 
a  month  of  the  signing  of  the  armistice. 

The  purposes  for  which  these  items  were  authorized  and 
obligated  and  expenditures  actually  made  are  summarized  in 
the  accompanying  table  from  the  second  annual  report  of  the 
Shipping  Board  :2 

Purposes  Authorizations  Commitments  Expenditures 

Requisitioned  ships $515,000,000  $479,487,827  $309,783,686 

Contract  ships 2,804,000,000  2,681,963,071  614,132,638 

Plant  and  property 177,000,000  148,495,000  100,258,840 

Housing 75,000,000  68,006,475  16,353,274 

Transportation 20,000,000  10,700,791            

Dry  docks  and  marine  railways  25,000,000  7,202,500  1,278,483 

Foreign  shipyards 55,000,000  50,823,750           

Total $3,671,000,000    $2,625,451,000     $1,041,806,923 

1  Second  Annual  Report,  U.  S.  Shipping  Board,  p.  138. 

2  Pages  98-99. 


WAR  CONTRACT  OPERATIONS  1 79 

Shipping   Board   Policy  Under  War  Time   Conditions 

To  understand  the  ship  contracting  situation  in  the  United 
States  as  part  of  the  war  program  one  must  take  some  account 
of  the  general  military  and  maritime  conditions  as  they  existed 
during  the  major  part  of  the  calendar  year  191 7.  When  that 
year  opened  Russia  had  as  good  as  collapsed,  so  complete  had 
the  imperial  debacle  become  as  to  practically  eliminate  the 
eastern  front  from  the  war  map  of  the  world.  That  released 
a  million  of  Germany's  troops  to  launch  against  the  Allies  in 
the  west,  whose  offensive  had  failed  owing  largely  to  jealousies 
among  those  in  high  command.^ 

March  21,  1918,  the  German  offensive  broke  with  surprising 
effectiveness,  crippling  the  British  man  power  to  such  an 
extent  as  to  impair  seriously  her  capacity  as  a  shipbuilding 
power  at  a  crisis  when  seagoing  tonnage  was  as  vital  as  muni- 
tions. Less  than  a  year  before  that  the  Shipping  Board's 
Emergency  Fleet  Corporation  signed  its  first  contract.  Its 
plan  of  construction  and  control  were  influenced  by  the  course 
of  events  and  develf)ped  with  remarkable  swiftness.  It 
found,  when  it  began  its  official  existence,  January  19,  1917, 
that  by  far  the  greater  part  of  the  country's  ship  constructing 
capacity  in  private  yards  was  committed  to  naval  work.  The 
government  already  had  control  of  facilities  under  priority 
contracts  for  repairs  as  well  as  construction.  Costs  were  so 
rapidly  advancing  that  some  of  the  contracts  even  then  were 
on  the  cost  plus  percentage  basis.  All  the  while,  during  the 
past  two  years,  the  Teutonic  submarines  had  been  pursuing 
their  piratical  work  of  destroying  merchant  shipping  at  a 
much  faster  rate  than  the  Allied  and  neutral  shipyards  were 
able  to  replace  it.  This  had  earlier  led  foreign  shipping 
interests  to  place  orders  with  American  yards,  in  which  there 
were  over  i  ,000,000  tons  of  steel  shipping  contracts  for  alien 
account.  These,  w^ith  the  naval  program,  committed  the 
steel  shipyards  to  a  full  year's  work  at  the  very  threshold  of 
the  war  shipbuilding  program. 

^  See  London  Correspondence  in  New  York  Times. 
13 


l80  GOVERNMENT   WAR   CONTRACTS 

Summarizing  the  situation,  with  special  regard  to  the 
submarine  menace,  the  Shipping  Board,  in  its  memorandum 
of  May  5,  191 7,  to  the  Senate  Committee  on  Commerce,  said : 

The  rate  of  destructivity  of  the  submarine  has  mounted  steadily  even  beyond 
our  calculations.  A  careful  study  of  all  the  available  sources  of  information 
which  have  come  to  your  board,  and  which  we  think  exhausts  all  that  is  to  be 
known  in  the  United  States,  clearly  indicates  that  the  Germans  are  destroying 
shipping  in  the  North  Atlantic  and  Mediterranean  at  the  rate  of  not  less  than 
13,000,000  tons  per  annum.  The  reproductive  capacity  of  the  steel  yards  of  all 
the  world  under  their  present  rate  of  reproduction  plus  all  the  wooden  ships  that 
can  be  built  inside  of  a  year  will  give  us  not  over  4,500,000  tons  of  new  vessels. 
.  .  .  Unless  the  Central  Powers  be  conquered  on  land,  it  is  apparent  from  the 
above  facts  that  Germany  may  be  victorious  within  the  year,  provided  the  above 
ratio  of  destruction  over  reproduction  is  not  changed. 

The  only  resource  left  to  the  Shipping  Board  is  the  stimulation  of  production  of 
steel  tonnage,  and  the  only  method  by  which  this  can  be  brought  about  is  by  drastic 
concentration  upon  shipbuilding  of  all  the  steel  producing  and  constructing 
agencies  within  the  nation.  The  first  step  necessary  is  the  abolition  of  the  slow 
time  commercial  ship  contracts,  and  the  rushed  completion  of  the  vessels  now 
started  by  double  shift  employment  of  the  yard  labor.^ 

This,  in  brief,  gives  the  Shipping  Board's  summary  of  fore- 
cast and  poHcy — that  on  the  ocean  the  AlHes  were  playing 
a  losing  game,  and  that  the  hope  of  the  cause  which  the 
United  States  had  so  lately  as  a  month  ago  espoused  lay  in 
building  steel  tonnage. 

It  was  part  of  the  board's  policy  to  avoid  as  far  as  possible 
direct  entrance  into  the  construction  of  ships  by  its  own 
organization.  On  the  other  hand,  it  needed  the  free  play  of 
a  corporate  agency.  Its  plan  of  construction,  under  the  act 
creating  it,  centered  in  a  subsidiary  corporation,  for  the  general 
management  of  which  it  had,  after  some  delay,  secured  the 
services  of  Gen.  George  W.  Goethals.  It  was  conceived  that 
as  shipbuilding  involved  just  such  contract  negotiations  and 
assemblage  of  men  and  materials  as  had  been  seen  in  the 
Panama  Canal  project,  therefore,  the  builder  of  that  marvel 
of  engineering  accomplishment  could  equally  put  through  the 
program  of  overmatching  the  German  menace.  The  Allied 
delegates  to  the  United  States  had  urged  the  vital  necessity 

^Hearings  before  the  Senate  Committee  on  Commerce,  65th  Cong.,  2d  Sess., 
Senate  Resolution  170:  Vol.  I,  pp.  iiio-iiii.  Shipping  Board  Emergency 
Pleet  Corporation  investigation,  1917-1918. 


WAR   CONTRACT   OPERATIONS  l8l 

of  concentrating  the  ship  operating  under  a  single  govern- 
mental agency.  For  this  purpose  the  Shipping  Board  asked 
and  obtained  commandeering  power  over  all  existing  ship- 
yard contracts,  including  not  only  shipbuilding  but  also  over 
all  industries  producing  ship  machinery  and  appliances.  This 
extent  of  control  over  industries  and  engagements  involved 
priorities  in  steel  production  and  all  other  nonmaritime  indus- 
tries capable  of  contributing  to  ship  construction.  Although 
the  Shipping  Board  did  not  go  so  far  as  to  commandeer  con- 
tracts of  vessels  under  construction,  thereby  complicating 
the  building  process  unduly,  it  obtained  power  by  executive 
order  of  June  7  to  requisition  all  ships  under  the  American 
flag  and  on  July  1 1  instructed  the  Emergency  Fleet  Corpora- 
tion to  requisition  all  American  vessels  under  construction. 
By  August  3  this  was  put  into  effect,  thereby  completing  the 
policy  of  concentration  of  control  over  existing  contract  work 
under  private  auspices.^ 

The   Fleet   Corporation's   Major  Lines   of   Contract 

On  November  i,  191 8,  the  Fleet  Corporation  had  ships 
under  contract  in  198  yards.  These  yards  had  1,083  ways, 
of  which  939  were  for  Fleet  Corporation  work  and  144  for  the 
navy.  The  government's  merchant  shipbuilding  during 
1 91 7  and  1 91 8  falls  into  four  separate  divisions  of  operation. 
All  of  these  came  under  the  activities  of  the  Emergency  Fleet 
Corporation.     They  are  officially  designated  as  follows : 

1 .  The  fabricated  yards,  of  which  there  were  four  steel  and 
five  concrete  yards,  in  addition  to  the  three  big  fabricated 
government  projects. ^ 

2.  The  investment  plants,  whose  property  and  construction 
plant  were  almost  wholly  paid  for  by  the  government.  They 
were  a  minor  feature. 

3.  Contract  yards,  to  which  the  major  part  of  the  yards 
belong. 

4.  The  requisitioned  yards,  private  contracts  involving 
compensation  awards.^ 

^  Shipping  Facts,  U.  S.  Shipping  Board,  p.  2. 

2  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  p.  132. 

^Ibid.,  pp.  120-122. 


l82  GOVERNMENT   WAR   CONTRACTS 

Although  this  classification  is  official,  it  has  only  provisional 
value,  because  the  main  questions  of  interest  center  around 
the  so-called  "fabricated"  yards  and  the  contract  plants. 
The  requisition  yards  afford  a  problem  of  their  own,  as  related 
to  contract  policy.  As  one  of  the  four  features  of  the  govern- 
ment's plan  to  expedite  ship  construction  it  should,  therefore, 
receive  its  share  of  consideration.  From  the  investment 
standpoint  the  government,  during  this  period,  found  it 
necessary,  in  placing  contracts  for  ships,  to  accompany  its 
awards  with  allotments  of  working  capital  or  fixed  investment 
in  yard  equipment.  With  regard  to  the  latter  portion  of  its 
capital  it  had  always  to  protect  itself  by  some  form  of  agree- 
ment as  to  the  ultimate  disposition  of  the  immovable  improve- 
ment. In  a  total  of  forty-one  different  shipbuilding  yards 
it  had  such  investments.  Its  largest  commitment  was,  of 
course,  in  the  fabricated  plants,  and  of  these  Hog  Island  took 
the  lion's  share  of  invested  funds. 


CHAPTER   XVII 

Kinds  of  Contracts  by  the  Fleet  Corporation 

Classifications  of  contractual  arrangements  by  the  Emer- 
gency Fleet  Corporation  vary  somewhat  according  to  the 
circumstances.  While  the  policy  of  the  Shipping  Board  was 
to  steer  clear  of  the  criticisable  cost  plus  percentage  form  as 
much  as  possible,  if  not  entirely,  it  did  by  no  means  get  far 
away  from  the  cost  basis  in  its  formulation  of  agreements. 
It  is  simply  playing  with  words  to  say,  as  was  officially 
stated  in  the  testimony  before  the  Senate  Commerce  Com- 
mittee, December  21,  191 7,  that  "we  have  not  made  any  cost- 
plus  contracts."^  It  was  about  this  time  that  the  term  "cost- 
plus"  became  as  a  red  rag  to  a  bull  in  the  eyes  of  Congress 
and  a  sensation  vending  press.  Nevertheless,  the  entire  war 
making  organization  of  the  government  was  at  that  very 
moment  operating  probably  three-fourths  of  its  entire  con- 
tractual commitments  on  some  form  of  cost-plus  contract — 
a  form  of  contract  in  which  some  recognized  type  of  cost 
determining  was  made  the  basis  of  production  of  war  materials 
and  in  which  in  addition  to  costs  the  contractors  were  being 
compensated  by  a  percentage  of  the  cost  or  fixed  profit. 
What  it  was  proper  and  politic  to  disclaim  was  the  fact  that 
the  initially  unavoidable  looseness  of  the  emergency  work 
contract  of  the  earliest  camp  construction  period  had  not  been 
followed  by  the  board  in  any  case.  It  had  acted  wisely  in 
avoiding  these  abuses,  temporary  though  they  were,  but  its 
biggest  commitments,  such  as  that  at  Hog  Island,  for  180 
ships,  at  Newark  for  150  ships,  and  at  Bristol  for  60  more — 
all  fabricating  yards  under  agency  contract — were  in  the 
form  not  of  percentages  but  fixed  fees  based  on  estimated 
costs."  Let  words  not  mislead  us,  however.  For  it  does  not 
take  any  genius  to  see  that  in  a  case  in  which  the  government 

^  Hearings  on  Senate  Resolution  No.  170,  65th  Cong.,  2d  Sess.,  Vol.  I,  p.  21. 
^Ibid.,  pp.  267,  757,  and  771. 

183 


1 84  GOVERNMENT   WAR   CONTRACTS 

pays  all  the  bills  on  a  vessel  whose  estimated  cost  Is  $1,100,000 
and  the  contractor's  fee  Is  $38,500,  the  compensation  is  3.5 
per  cent  on  cost,  just  as  much  as  if  it  had  been  a  cantonment 
contract,  on  a  dyed-In-the-wool,  cost  plus  percentage  basis. 
The  difference  between  the  two  contracts  was  mainly  In  the 
safeguards  thrown  around  the  elements  of  expense  mostly  by 
fixing  a  maximum  fee  earnable  on  each  ship  and  In  the  form 
of  premiums  put  on  holding  down  expenses  without  unduly 
retarding  the  work. 

Four  Types  in  Fleet  Corporation  Awards 

There  were  four  different  kinds  of  contracts  under  which 
the  unparalleled  achievements  of  the  Fleet  Corporation  did 
its  work  of  shipbuilding  and  repalrln,g.  These  may  be 
classified  as  follows: 

1.  Contracts  covering  the  work  on  requisitioned  vessels 
and  the  commandeered  ships,  w^hlch  had  varied  forms  of 
compensation  for  the  owners,  under  conditions  existing  in 
private  yards. 

2.  The  flat  price  contract,  such  as  the  government  usually 
employed  In  prewar  work  and  which  Gen.  George  W.  Goethals 
insisted  on  as  the  better  kind  even  for  war  time  awards  In  the 
shipbuilding  field. 

3.  The  cost  plus  a  percentage  or  a  fixed  fee  on  cost.  This 
was  usually  a  graduated  fee,  of  a  lump  sum  amounting  to  a 
smaller  percentage  on  the  cost  as  the  total  costs  increased. 
It  contained,  as  one  of  its  features,  a  provision  that  no  matter 
how  high  the  costs  might  go,  the  contractor  could  not  get 
above  a  fixed  maximum  out  of  a  given  contract,  but  that  if  he 
brought  the  cost  within  the  estimated  cost  basis  he  was  en- 
titled to  share  prorata  the  winnings  with  the  government  and 
labor. 

4.  The  agency  form  of  contract.  This  was  the  form  under 
which  the  Emergency  Fleet  Corporation  carried  out  its  work 
of  creating  the  shipyards  and  constructing  ships  by  the  agency 
service  of  the  three  great  fabricating  yards — the  American 
International  Shipbuilding  Corporation,  at  Hog  Island,  the 


WAR   CONTRACT   OPERATIONS  1 85 

Merchant  Shipbuilding  Corporation,  at  Bristol,  Pennsylvania, 
and  the  Submarine  Boat  Corporation,  at  Newark,  New  Jersey. 
At  these  government  agency  plants,  ships,  says  the  Shipping 
Board's  report  of  1918,  "are  contracted  for  at  a  certain  figure 
estimated  to  cover  the  cost  of  the  vessels,  and  the  contractor 
receives  a  fee  from  3  to  7I  per  cent  of  the  estimated  cost, 
with  a  bonus  in  case  the  vessels  are  built  at  a  cost  less  than 
the  estimated  figure,  or  in  case  of  delivery  before  the  sched- 
uled date."  ^ 

General  Policy  of  Ship  Contract  Compensation 

A  good  statement  of  the  policy  followed  and  the  principles 
adhered  to  by  the  Shipping  Board,  which  governed  the  Fleet 
Corporation  in  its  contracting  arrangements,  is  given  by  its 
chairman  in  his  testimony  in  the  Senate  Hearings  in  Decem- 
ber, 1917.  There  Mr.  Edward  N.  Hurley  describes  the 
kinds  of  contracts  in  use,  as  follows  i^ 

We  do  not  have  any  cost-plus  contracts.  That  is,  you  build  a  ship  for  $1 ,000,000 
and  you  get  10  per  cent  on  that.  We  have  a  provision  in  that  contract — we 
reduce  the  percentage.  The  navy  is  building  some  of  its  ships  on  a  cost-plus 
basis.  Our  contracts  vary.  Mr.  Goethals  placed  a  number  of  contracts  at  a 
flat  price  and  some  on  a  percentage  basis.  Admiral  Capps  made  a  number  of  con- 
tracts at  a  flat  price  and  others  on  a  definite  fee  basis. 

In  the  early  days  of  the  corporation  a  few  contracts  were  let  on  the  basis  of  the 
contractor's  receiving  the  actual  cost  of  the  vessel  plus  a  profit  of  lo  per  cent. 
The  next  step  was  to  let  contracts  on  a  cost  plus  a  fee  basis,  the  contractor  to  be 
paid  the  actual  cost  of  the  vessel  plus  a  fixed  fee  for  his  services. 

Two  illustrations  may  here  serve  to  give  concreteness  to 
the  otherwise  formal  statements  of  fees  paid.  They  show 
how  the  corporation,  in  its  contracting  provisions,  sought  to 
give  the  contractor  an  appreciation  of  the  government's 
policy  of  profiting  by  experience.  For  twelve  w^ood  cargo- 
carrying  steamers,  which  the  Grant-Smith-Porter-Guthrie 
Company  of  Oregon  contracted  to  deliver,  the  government's 
corporation  as  owner  agreed  to  pay  a  lump  sum  fee  of  $19,000 
each.  In  order  that  the  contracting  party  should  not  run  over 
the  estimated  cost  of  $285,000  for  each  vessel,  the  agreement 

1  Second  Annual  Report,  U.  S.  Shipping  Board,  p.  121. 

^  Hearings  on  Senate  Resolution  170,  65th  Cong..  2d  Sess.,  Vol.  I,  p.  29. 


l86  GOVERNMENT   WAR  CONTRACTS 

was  that  the  Fleet  Corporation  may  withhold  from  this  pur- 
chase price  for  the  completed  hull  "any  amount  over  the 
actual  cost  of  the  work  plus  $19,000,  so  that  the  contractor's 
profit  on  each  hull  shall  be  limited  to  $19, 000. "^  In  the  other 
case,  that  of  the  Hog  Island  contract,  it  was  agreed  that  the 
contracting  agent's  fee  on  each  of  the  first  50  ships  built 
should  average  not  less  than  $41,000  for  each  vessel  completed 
and  accepted;  but  that  the  agent's  fee  for  the  first  150  vessels 
or  less  of  the  same  size  and  type  should  not  be  less  on  the  aver- 
age than  $38,500.-  These  arrangements  fixed  in  the  con- 
tracts the  maximum  and  the  minimum  fees. 

Principle  of  Payment  in  Agency  Contracts 

The  principle  running  through  the  agency  form  of  contract 
is  set  forth  officially  in  the  subjoined  quotation : 

The  contractor  to  construct  the  vessels  at  a  plant  owned  by  the  owner  on  a 
cost  plus  a  sliding  fee  basis,  the  fee  stated  being  approximately  5  per  cent  of  the 
estimated  cost  of  the  vessels,  with  a  provision,  however,  providing  for  the  reduc- 
tion of  the  fee  in  case  the  cost  of  the  vessel  exceeded  the  estimated  cost,  the  min- 
imum fee  being  approximately  4  per  cent  of  the  estimated  cost.  The  contract 
also  provided  for  an  increased  fee  in  case  the  actual  cost  of  the  vessel  was  less 
than  the  estimated  cost.  In  this  connection  it  is  noted  that  in  each  case  the  saving 
effected  was  divided  in  three  parts,  one  part  was  to  go  to  the  corporation,  one  part 
to  the  contractor,  and  the  remainder  to  be  distributed  among  the  workmen. 

For  some  time  past  the  corporation  has  favored  a  straight  lump  sum  basis  form 
of  contract,  in  some  cases  with  certain  protections  against  increased  material  and 
labor  costs.  Where  the  probable  cost  of  work  is  not  known,  however,  and  can 
not  be  agreed  upon  the  corporation  has  entered  into  a  few  contracts  with  reliable 
yards  under  a  cost  plus  fixed  fee  basis,  the  fee  named  being  about  lO  per  cent  of  the 
estimated  cost.' 

The  principle  is  here  recognized  that  in  what  has  been 
known  as  pioneering  work  in  fields  of  an  experimental  nature 
and  in  production,  in  which  probable  costs  can  not  be  arrived 
at,  it  is  safe  to  contract  with  reliable  firms  to  get  the  gov- 
ernment's work  done  by  cost  plus  percentage  contracts.  As 
a  rule  this  is  the  one  justifiable  field  in  which  this  latter 
type  of  contract  must  be  resorted  to,  or  the  government  do 

1  Hearings  on  Senate  Resolution  170,  65th  Cong.,  2d  Sess.,  Vol.  I,  p.  704. 

2  Ibid.,  p.  270. 

^  Ibid.,  pp.  29-30. 


WAR  CONTRACT  OPERATIONS  1 87 

the  experimenting  on  its  own  account.  If,  however,  the 
government  has  no  adequate  organization  or  outfit  to  do 
similar  work,  it  is  manifestly  the  part  of  wisdom  to  find  some 
concern  which  has,  and  if  the  firm  is  one  of  honorable  stand- 
ards of  dealing  with  the  public  interest,  it  will  not  only  be 
stricter  with  itself  on  public  account  than  it  would  be  on 
private  contract,  but  would  consider  it  an  honor  and  patriotic 
privilege  to  assist  the  authorities  in  elaborating  their  plans 
of  pioneering  achievement. 

General  terms  of  payment  for  work  in  the  fabricated  yards 
differed  materially  from  those  in  lump  sum  arrangements. 
The  few  cost-plus  contracts  of  the  two  types,  comprising  only 
15  vessels  out  of  149,  may  be  disregarded  for  the  present. 
The  agency  contract  payments,  for  the  American  Inter- 
national Corporation,  which  functioned  at  Hog  Island  as  the 
responsible  contractor,  called  for  a  fee  of  $55,000  for  each 
cargo  vessel,  and  $82,500  for  each  troop  ship,  costing  respec- 
tively $1,100,000  and  $1,650,000  on  preliminary  estimate. 
This  estimate  was  part  of  the  contract,  and  was  the  basis  of 
comparison  for  the  actual  cost.  Besides  the  5  per  cent  on 
estimated  cost,  the  fee  was  increased  by  a  part  of  the  differ- 
ence between  the  actual  and  estimated  cost.  If  the  actual 
cost  fell  below,  the  agent  got  one-third  of  the  saving,  the 
Fleet  Corporation  another  third,  and  the  workmen  the  re- 
maining third.  How  well  this  excellent  provision  worked 
out  is  not  as  yet  made  known;  but  in  principle  it  met  with 
high  approval.  The  fee  thus  specified  might  be  further 
enhanced  or  decreased  per  vessel,  by  the  premiums  or  pen- 
alties of  delivery  ahead  of  or  behind  the  scheduled  dates. 
As  much  as  $14,000  could  thus  be  earned  and  $17,500  for  the 
troop  ships.  On  the  other  hand  the  contractor  was  liable  to 
be  penalized  for  delays  in  delivery,  from  whatever  cause. 
The  maximum  damages  for  belated  vessel  delivery  were 
$14,000  and  $17,500  per  troop  ship.  Even  with  these  reduc- 
tions, which  occurred  if  the  actual  cost  exceeded  the  esti- 
mated cost  per  ship,  the  contractor's  fee  per  ship  could  not 
go  below  $41,000  and  $65,000,  respectively.     At  these  rater 


1 88  GOVERNMENT   WAR   CONTRACTS 

of    payment,    its    earnings    as    agent    were    approximately 
$6,000,000  on  the  construction  of  the  first  120  ships. 

Lump  Sum  Contracts  in  80  Per  Cent  of  Awards 

The  relative  numerical  importance  of  these  several  classes 
of  contracts  as  of  December  i,  191 7,  under  the  grouping  fol- 
lowed by  the  Emergency  Fleet  Corporation,  is  made  clear  by 
the  following  summary:^ 

CLASSES  OF   CONTRACTS 

Lump  sum  contracts  made 130  Lump  sum  contracts 130 

Cost-plus  contracts 15           Wood  hulls  and  i  steel  barge.   45 

(a)  Fee  guaranteed,  9  Complete  wood  steamers.  ...      6 

(b)  Sliding  scale  fee,  6  Steamers,  wood  and  steel.  ...     4 
Agency  contracts 4           Complete  steel  steamers  ....   66 

Other  than  lump  sum  contracts. ..      19 

Total  149  149 

From  this  summary  it  is  apparent  that  the  lump  sum  con- 
tract is  the  type  in  most  general  use.  This  form  prevails 
mostly  in  contracting  for  steel  steamers  and  for  wood  hull 
contracts.  In  the  majority  of  cases,  under  this  form,  the 
contractor  furnishes  his  own  plant.  In  a  comparatively 
minor  proportion  of  lump  sum  contracts  the  contractor 
receives  some  advanced  payments  to  assist  him  in  completing 
his  plant.  On  the  w^hole,  the  Fleet  Corporation's  practice 
has  been  to  adhere  to  the  commercial  basis  of  awards,  as  80 
per  cent  of  the  total  awards  were  lump  sum  agreements.  Of 
the  cost-plus  variety  the  guaranteed  fee  type  includes  only 
nine,  consisting  of  five  wood  hull  contracts  and  four  complete 
wood  vessels;  so  that  these  are  of  comparatively  small  im- 
portance in  the  larger  total  of  awards.  These,  according  to 
the  testimony  of  Admiral  Bowles,  were  all  early  contracts, 
the  date  of  the  latest  being  July  21,  191 7.  Of  even  earlier 
date  are  the  six  sliding  scale  fee  type  of  contracts,  all  of  which 
were  wooden  hulls.  Of  agency  contracts  there  were  only 
four  of  prime  importance.  They  were  of  the  colossal  scope 
embraced  in  the  fabricated  shipyards  from  which  390  ves- 
sels of  5,000  to  9,000  tons  were  to  be  launched,  all  steel 
construction. 

^  Hearings  on  Senate  Resolution  170,  65th  Cong.,  2d  Sess.,  Vol.  I,  pp.  252-240. 


CHAPTER   XVIII 

Salient  Features  of  Shipbuilding  Contracts 

Analysis  of  some  of  the  more  salient  features  of  the  several 
different  kinds  of  shipbuilding  contracts  will  help  to  show 
how  the  interests  of  owner  and  contractor  stand  under  these 
several  types  of  agreement.^  This  is  done  from  the  following 
four  viewpoints: 

(i)  Payments,  or  form  of  compensation,  including  terms 
generally. 

(2)  Plant,  including  the  ownership,  financing,  advance 
payments  for  extensions,  title  to  real  estate,  etc. 

(3)  Subcontracts  and  control  over  producing  process. 

(4)  Premiums,  damages  and  other  efficiency  provisions. 

Payments 

(a)  Lump  sum  contracts  call  for  a  flat  price  subject  to 
changes  due  (i)  to  alterations  in  plans  and  specifications;  (2) 
to  increase  or  decrease  in  cost  by  variation  from  basic  labor 
and  material  costs;  (3)  to  premiums  or  penalties  on  delivery 
schedule  or  savings  on  estimated  cost  basis;  (4)  insurance. 

(b)  Guaranteed  fee  type  pays  the  owner  the  actual  cost  and 
a  fixed  fee,  including  cost  of  plant  and  extensions,  definite 
costs  as  in  Munitions  Manufacturers'  Tax  Act.-  Example  is  a 
fee  of  $20,000  on  wood  hull  ships  and  $40,000  on  completed 
ships.  As  fee  is  guaranteed,  labor  and  material  costs  are  not 
protected.^ 

(c)  Sliding  scale  fee  contracts  award  the  owner  the  actual 
costs  (munitions  manufacturers'  tax  standard)-  plus  a  fee 
varying  in  size  with  the  difference  between  the  estimated  base 

1  Hearings  on  Senate  Resolution  170,  Vol.  I,  pp.  236-240. 

2  Revenue  Laws,  Public,  No.  271,  64th  Cong.,  in  Act  approved  Septembers, 
1916:  Title  III,  sec.  302. 

^Hearings  on  Senate  Resolution  170,  Vol.  I,  p.  237. 

189 


IQO  GOVERNMENT   WAR    CONTRACTS 

cost  and  the  actual  cost.  If  the  actual  cost  is  less,  the  fee  is 
enhanced  by  half  the  saving;  if  the  actual  is  more,  the  fee  is 
cut  down  by  the  excess  up  to  the  amount  of  the  normal  fee, 
thus  wiping  out  the  normal  fee  entirely,  and  the  owner  bearing 
the  excess  of  actual  over  estimated  cost. 

(d)  Owners'  pay,  in  agency  contracts,  (i)  cost  of  vessel;  (2) 
agent's  fee,  and  (3)  costs  of  extensions,  housing,  etc.  Esti- 
mated basis  cost  is  subject  to  (i)  wage  changes  from  schedule, 
also  on  materials;  (2)  alteration  expenses;  (3)  changes  due  to 
labor  conditions  and  owners'  orders,  and  (4)  lower  insurance. 
Cost  of  vessel  includes  rent  of  real  estate,  but  not  the  salaries 
of  the  executives.  Estimated  base  cost  does  not  include  cost 
of  plant. 

The  fee  earned  by  agent  is  an  agreed  normal  fee,  contingent 

(a)  on  actual  cost  equalling  estimated  cost,  and  may  be  in- 
creased by  one-third  of  any  amount  by  which  actual  cost  is 
brought  under  estimated  cost;  or  be  decreased  by  one-half  of 
excess  of  actual  over  estimated  cost,  by  losses  arising  from 
agent's  neglect,  by  liquidated  damages  for  delay  in  delivery 
of  $300  to  $500  per  day  (Contract  83),  without  reducing  aver- 
age fee  below  agreed  minimum,  of  $38,500,  in  Contract  86; 

(b)  by  premium  of  $300  to  $500  for  advanced  delivery,  but 
not  to  exceed  a  specified  maximum  per  vessel. 

Earlier  Advances  and  Later  Precautions 

As  to  the  times  and  frequency  of  payments,  also  conditions 
on  which  payments  on  account  are  made,  the  Emergency  Fleet 
Corporation  naturally  followed  different  methods  with  differ- 
ent contracts.  On  the  whole,  however,  the  urgency  of  the 
work  called  for  some  concessions  to  shipbuilders  whose  work- 
ing capital  was  limited  or  whose  yards  had  to  make  extensions 
to  begin  the  contract.  As  a  rule  the  payments  fell  into  three 
classes:  (a)  first  payments,  usually  as  advance  payments;  (b) 
progress  payments,  and  (c)  final  payments.  The  procedure 
in  lump  sum  contract  work  was  to  make  the  first  of  these 
payments  thirty  days  after  the  execution  of  the  contract,  of 
about  10  per  cent  of  the  total  price  of  all   hulls   or  vessels 


WAR   CONTRACT    OPERATIONS  I9I 

awarded.  Earlier  experience  observed  few  if  any  restrictions ; 
but  later  it  became  advisable  to  impose  conditions  on  the 
part  of  the  contractor,  of  which  the  following  are  typical : 

(i)  The  contractor  must  have  made  commitments  in  labor 
and  material  costs  equal  in  amount  to  the  first  payment. 

(2)  It  was  then  specified  that,  as  a  rule,  the  first  instalment 
should  go  into  the  building  of  hulls,  not  into  plant  construction. 

(3)  Contracts  executed  after  July  15  frequently  contain  the 
requirement  that  a  specified  number  of  ways  must  be  done 
before  first  payment  is  made. 

(4)  First  payments,  after  July,  1917,  were  further  condi- 
tioned on  the  contractor's  ability  to  show  that  cash  had  been 
paid  out  for  labor  and  (or)  materials  used  or  on  hand  for  use 
in  hulls.  And  this  condition  had  thereafter  to  be  insured  by 
placing  first  payments  in  the  hands  of  trustees  transferable  to 
contractors  by  the  corporation's  representatives  attesting 
that  funds  were  used  only  for  hull  construction,  or  the  con- 
tractor had  to  give  surety  bond  or  mortgage  on  his  plant  to 
guarantee  proper  application  of  moneys  in  first  payments. 

In  spite  of  precautions  to  guard  against  financially  un- 
dependable  contracting  concerns,  there  were  not  a  few  aspir- 
ing organizations  which,  by  hook  or  crook,  succeeded  in  getting 
awards  for  ships.  For  these,  rather  than  the  generally  reliable 
shipbuilding  contractors,  stringent  restrictions  on  payments 
were  needed.  Ambitious  localities  in  some  few  cases  really 
improvised  an  organization,  with  hopeful  local  backing  and 
maybe  political  encouragement,  "to  get  some  of  the  big  money 
that  Uncle  Sam  was  paying  out  for  ships."  A  typical  abuse  of 
first  payments  came  in  the  case  of  some  contractors  who  got 
some  of  the  earliest  contracts.  The  Fleet  Corporation  made 
its  first  contract  on  April  27,  1917.^  Between  that  date  and 
June  23  there  were  awarded  thirteen  contracts  for  114  vessels 
and  hulls,  mostly  to  Pacific  coast  builders.  In  the  terms  of 
payment  there  was  no  provision  insuring  that  the  contractor 
had  committed  himself  for  labor  and  materials  to  the  extent 

^Hearing  on  Senate  Resolution  170,  Vol.  I,  pp.  1314-1316. 


192  GOVERNMENT   WAR   CONTRACTS 

of  the  payments  advanced.  Lapse  of  time  seemed  to  be  the 
only  condition  (thirty  or  sixty  days  after  signing  the  contract), 
plus  the  provision  of  submitting  a  sworn  statement  of  equal 
"obligations  incurred,"  to  abstract  hundreds  of  thousands 
from  the  Fleet  Corporation  treasury  on  its  earliest  contracts. 

Both  Parties  at  Fault  in  Sloan  Shipyards  Case 

Possibly  the  most  notable  instance  of  a  shipyard's  obtaining 
advances  of  funds  on  what  seemed  inadequate  grounds  oc- 
curred in  the  dealings  of  the  government  with  the  Sloan 
Shipyards  Corporation  of  Seattle  and  Olympia,  Washington. 
Its  Contract  No.  6  was  for  the  construction  of  sixteen  wooden 
steamers  at  $490,000  apiece,  and  was  dated  May  18.  Thirty 
days  later,  on  that  lump  sum  contract  of  $7,840,000,  a  first 
payment  of  1 1  per  cent  or  $872,000  was  advanced  on  the  say-so 
of  the  company's  vice  president.  He  had  not  only  submitted 
the  required  sworn  statement,  but  was  supported  by  the  cor- 
poration's auditors,  who,  after  checking  up  the  statements  of 
labor  and  material  obligations,  w^ere  none  the  less  reluctant  to 
approve  the  payment  on  the  showing  at  the  yard.  But  the 
disposition  to  yield  to  the  rather  loosely  drawn  terms  of  the 
contract  prevailed.  On  no  better  showing,  this  contractor  got 
an  equal  amount  on  second  payment — a  "progress"  payment; 
although  it  was  known  by  the  corporation's  representatives 
that  the  ways  of  the  shipyards  were  cumbered  with  unfinished 
motor  boats  for  private  account  instead  of  being  cleared  for 
the  laying  of  Fleet  Corporation  keels.  Meanwhile  the  en- 
terprising abstractor  of  public  funds,  with  honest  enough 
purpose,  alarmed  by  the  profiteering  proclivities  of  would-be 
subcontractors,  was  busy  organizing  subsidiaries  to  produce 
the  needed  materials  and  machinery,  thus  neglecting  the 
management  of  the  construction  end  of  the  work.  It  was  not 
until  September,  three  or  four  months  after  the  contract  was 
signed,  and  the  contractor  had  drawn  out  $1,744,000,  or  22 
per  cent  of  his  award,  that  complaints  reached  the  offices  of 
the  Fleet  Corporation's  law  department  "that  the  plant  was 
being  badly  managed ;  that  Mr.  Sloan  was  a  very  bad  executive 


WAR   CONTRACT   OPERATIONS  I93 

.     .     .     and  was    handling   the    situation   like   a    promoter 
instead  of  like  a  shipbuilder."     In  other  words — 

Mr.  Sloan  was  going  around  promoting  small  concerns  in  order  to  make  a  saving 
on  the  lumber,  and  some  of  the  other  materials,  and  he  was  doing  that  with  this 
money  that  had  been  advanced.' 

As  a  result,  we  had  them  agree  to  this  provision,  that  the  yard  was  to  be  run 
by  people  who  were  appointed  by  the  Sloan  Company  and  approved  by  us; 
that  all  the  employes  of  the  Sloan  Shipyard  Company  .  .  .  were  to  be 
subject  to  our  approval,  and  that  the  scope  of  their  duties  was  likewise  to 
be  subject  to  our  approval;  but  that  Mr.  Sloan  was  to  resign  from  the  active 
management  and  was  to  be  retained  only  for  such  duties  as  we  might  ask  him 
to  undertake.^ 

This  first  or  advanced  payment  became  notorious  from  the 
reproduction  of  the  check  in  the  newspapers  of  the  locality.^ 
As  late  as  January  29,  191 8,  not  one  of  these  sixteen  ships  was 
in  course  of  construction.^  The  government,  without  exer- 
cising its  right  to  take  over  contracts  if  the  progress  was  not 
satisfactory,  did  assume  supervision.  That  was  deemed  the 
better  course  under  the  conditions.  In  the  form  of  supple- 
mentary contract  it  was  provided  that  all  moneys  coming  to 
the  Sloan  Shipyards  Company  went  into  a  controlled  account; 
that  all  moneys  coming  in  on  unfinished  contract  work  still 
on  the  ways  (four  motor  boats)  in  the  same  yard  be  likewise 
controlled;  that  the  Fleet  Corporation  supervise  overhead 
expenses,  veto  unacceptable  appointments  and  define  duties 
of  employes,  and  also  secure  repayment  of  moneys  advanced 
for  construction  of  ships,  but  which  had  gone  into  other 
purposes,  by  mortgages  on  the  company's  three  plants,  lumber 
company,  etc.^ 

This  was  one  of  the  Fleet  Corporation's  earliest  experiences 
in  handling  advanced  payments  on  a  lump  sum  contract. 
Not  all  abuses  came  from  cost-plus  contracts.  The  lawyers  of 
the  council's  office  had  cautioned  the  board  against  too  free 
advances.     Of  course,   the  extenuating  circumstances  were 

^Hearing  on  Senate  Resolution  170,  Vol.  II,  p.  1318. 
^Ibid.,  p.  1323. 
^Ibid.,  p.  13 1 5. 
*Ibid.,  p.  13 1 7. 
^Ibid.,  pp.  1324-1325. 


194  GOVERNMENT   WAR   CONTRACTS 

the  rush  to  get  contracts  under  way.  Better  bargains  might 
have  been  made  had  more  time  been  available.  As  it  was, 
people  in  official  charge  had  to  act  on  their  best  judgment, 
with  all  the  risks  of  sacrificing  quality  of  work  for  quantitative 
results.  The  government,  in  advancing  capital,  had  to  have 
faith  in  ultimate  results  rather  than  emphasize  too  heavily 
initial  methods  or  conditions. 

Capital  advances  on  the  part  of  the  government  (owner)  to 
the  contractor  or  agent  in  the  form  of  plant,  machinery,  and 
the  like  may  be  more  or  less  arbitrarily  classed  as  fixed ;  while 
the  advances  for  the  purchase  of  materials,  payrolls  and  other 
requisites  might  be  regarded  as  working  capital.  In  the 
advances  to  subcontractors  this  distinction  tends  to  disap- 
pear. How  these  outlays  were  arranged  u^ider  the  different 
kinds  of  contracts  is  summarized  herewith: 

Plant,  Financing  Extensions  and  Real  Estate 

(a)  In  the  earlier  lump  sum  contracts,  advanced  payments 
might  be  used  for  plant  extension  or  construction  of  vessels. 
The  contractor  had  the  right  of  plant  repurchase,  at  end  of 
contract.  As  arrangements  became  more  standardized,  the 
government  allowed  only  part  of  advances  to  go  into  ways,  in 
some  cases  requiring  an  equal  amount  from  the  contractor. 
To  secure  the  government  this  money  is  put  into  a  trustee 
account  to  be  drawn  out  by  countersignature  of  owner,  or  a 
surety  bond  is  required  on  the  contractor's  plant.  In  Con- 
tract No.  99,  the  contractor's  fee  could  be  withheld  until 
accruals  covered  total  advances  due.^ 

(b)  In  the  guaranteed  fee  type  of  cost-plus  contract,  the  ad- 
vanced payments  for  plant  additions  were  treated  differently : 
they  were  spread  over  the  cost  of  the  vessel  and  so  accrued  to 
the  owner  (government),  who  imposed  a  limit  for  extension 
outlay  and  gave  the  contractor  an  option  for  added  plant 
repurchase. 

(c)  In  the  sliding  scale  type,  the  plant  extension  costs  are 
likewise  absorbed  into  the  cost  of  the  hulls  and  are  borne  by 

'Hearings  on  Senate  Resolution  170,  p.  239. 


WAR   CONTRACT   OPERATIONS  195 

the  owner,  if  the  expense  is  made  by  him.  Extensions  made 
by  the  contractor  belong  to  him.  The  owner  may  give  him 
an  option  for  repurchase,  as  is  usually  done. 

(d)  In  agency  contracts  the  land  was  owned  by  the  con- 
tractor, except  in  Contract  No.  86  (Newark) ,  where  the  city 
had  title.  In  all  of  the  three  big  agency  contracts  the  govern- 
ment was  the  builder  of  the  plant,  with  special  provisions  as 
to  options  to  purchase  where  ownership  in  land  and  plant  are 
different.^ 

Subcontracts  and  Control  in  Construction,  etc. 

In  lump  sum  contracts  the  approval  of  government  is 
generally  required  for  subcontracting  for  materials,  machinery 
and  other  outside  work.  In  both  types  of  cost-plus  contracts 
the  government  exercises  complete  control  over  all  orders, 
commitments  and  supplies  for  ships  and  plant.  Some  earlier 
munitions  contracts  were  subcontracted,  however,  without 
regard  to  the  government's  regulations,  making  the  prime 
contractor  liable  under  the  common  law  to  the  subcontractor. 
In  the  agency  contract  complete  control  is  assumed  of  agency 
commitments,  with  agent's  obligation  to  protect  owner's 
interest. 

Premiums  and  Damages 

These  two  items  were  discussed  under  "Payments." 
Corporation's  Policy  Toward  Contract  Shipyards 

The  Fleet  Corporation  had  contracts  wuth  many  private 
yards.  In  spite  of  the  favorable  attitude  of  the  Fleet  Corpora- 
tion toward  these  yards  with  which  it  had  done  direct  con- 
tracting, it  is  doubtful  whether  their  real  value  was  duly  esti- 
mated in  the  national  emergency  for  ocean  tonnage.  The 
effectiveness  of  these  contract  yards  in  carrying  out  the  gov- 
ernment's plans  to  expedite  construction  may  be  gauged  by 
the  fact  that  in  the  single  year  ending  August  31,  191 8,  they 
had  put  into  service  287  ships  of  1,800,000  tons,  laid  566  keels 
and   launched   358   ships.'     The   completed   ships  delivered 

^Hearings  on  Senate  Resolution  170,  p.  240. 

2  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  p.  133. 

14 


196  GOVERNMENT   WAR   CONTRACTS 

yielded  to  the  government  practically  twice  the  tonnage  con- 
tracted for  under  the  mammoth  Hog  Island  plant's  operations. 
And  the  Fleet  Corporation  in  these  smaller  contract  shipyards 
had  under  contract  on  the  same  date  9,113,880  deadweight 
tons  more.  That  was  almost  ten  times  the  quantity  of  ton- 
nage contracted  for  to  the  50-way  Goliath  on  the  lower  Dela- 
ware. There  was  more  rationality,  more  business  horse-sense 
in  this  part  of  the  Shipping  Board's  policies  than  in  all  others 
put  together.  The  simple  reason  lay  in  giving  to  a  special  in- 
dustry contracts  for  work  in  which  they  had  simply  to  repeat 
achieved  results  on  existing  standards — a  plain  process  of 
repeating  orders  or  duplicating  units.  It  was  a  case  of  vol- 
untary duplication  of  experience  by  cooperation  with  the 
government,  without  purporting  to  sell  at  a  high  percentage 
on  cost  an  intangible  something  called  the  "know  how";  or 
of  dragooning  private  shipbuilders  into  service  by  the  gentle 
art  of  commandeering,  both  of  which,  if  not  ill  advised  in 
policy,  were  certainly  more  uneconomic  in  execution.  The 
board's  policy  with  contract  yards  is  thus  stated: 

Our  policy  has  been  to  assist  the  builders  to  construct  duplicate  ships  of  those 
they  had  built,  after  selecting  the  most  useful  types  in  all  yards  building  exclu- 
sively for  the  Emergency  Fleet  Corporation.  This  has  practically  resulted  in  one 
class  of  ship  being  built  in  each  yard,  a  condition  which  is  obviously  conducive 
to  maximum  production.  New  yards  have  likewise  concentrated  upon  a  single 
type  so  that  upon  completion  of  the  first  ship  a  substantial  saving  is  effected  in 
the  following  ships.i 

Much  of  the  Shipping  Board's  most  successful  work  in 
stimulating  steel  construction  was  done  through  this  plan  of 
contracting  for  work  with  existing  shipyards.  They  com- 
prised the  majority  of  yards  with  which  the  Fleet  Corporation 
had  contracts.  The  actual  arrangements  between  the  govern- 
ment and  the  yards  varied,  as  far  as  the  form  or  type  of  con- 
tract was  concerned.  The  policy  was  to  meet  the  yards  more 
than  half  way,  by  adapting  contracts  to  their  conditions.  The 
board's  second  annual  report  thlis  describes  it: 

Contracts  have  been  let  to  these  yards  on  the  lump  sum  basis,  the  cost  plus 
iee  basis,  the  cost  plus  fee  and  partial  saving  basis  and  the  per  deadweight  ton 

1  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  p.  133. 


WAR   CONTRACT   OPERATIONS  197 

basis.  In  a  number  of  cases,  advanced  payments  on  account  of  vessels  have  been 
made  to  assist  in  plant  expansion.  Repayment  as  a  rule  is  secured  by  a  bond  and 
mortgage  and  the  Emergency  Fleet  Corporation  is  further  given  the  right  to  retain 
the  amount  advanced  out  of  the  amount  due  the  contractor  on  the  purchase  price 
of  the  vessels.  Contributions  have  also  been  made  by  the  Emergency  Fleet 
Corporation  to  increase  the  plant  facilities  of  the  contractor  in  some  cases,  on 
condition  that  the  contractor  expend  a  certain  stated  amount  of  his  own  funds  for 
the  same  purpose.^ 

The  policy  of  the  board,  to  be  liberal  to  the  smaller  yards,  was  no  doubt  justified 
on  emergency  grounds.  But  it  led  probably  to  an  exaggerated  notion  in  the  popu- 
lar mind  as  to  the  profits  which  shipbuilders  were  making  out  of  the  government. 
The  prices  for  lump  sum  contract  ships  were  about  $i6o  on  the  east  coast  steel 
ships  and  about  $i68  to  $170  on  the  west  coast,  according  to  the  testimony  of  the 
Fleet  Corporation's  manager  of  the  contract  division.^  That  was  in  December, 
1917,  after  which  the  whole  contractual  price  level  was  disturbed  by  the  heavy 
excess  profits  and  war  taxes,  as  a  sequal  to  which  prices  immediately  went  higher. 
These  and  other  uncertain  conditions  in  the  labor  market  caused  the  abandon- 
ment of  the  lump  sum  contracts  in  favor  of  cost-plus  forms,  in  steel  ships  but  not 
for  wooden  ships.^ 

1  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  p.  121. 
^Hearings  on  Senate  Resolution  170,  Vol.  I,  p.  437. 
^  Ibid.,  p.  438. 


CHAPTER    XIX 

Compensation  in  Requisitioned  Ship  Program 

Requisitioned  ship  settlements  stand  on  a  different  basis. 
There  the  contractual  relations  between  the  yards  and  the 
owners  were  not  disturbed,  but  the  government  took  charge 
in  a  general  way  at  least  of  construction  and  acquired  control 
of  the  output  as  completed.  The  conditions  and  the  nature 
of  the  problem  as  they  relate  to  the  contractual  position  of 
the  government  are  the  first  to  be  considered. 

Requisitioning  of  ships  falls  under  two  different  heads,  of 
those  completed  vessels  taken  over  for  operating  purposes  by 
the  Shipping  Board  and  of  those  which  the  Emergency 
Fleet  Corporation  found  in  process  of  construction  in  Amer- 
ican yards  and  assumed  control  of  for  the  purpose  of  ex- 
pediting their  completion. 

This  situation  as  of  September  i,  191 8,  stood  as  follows: 

Requisitioned  by —  No.  of  Vessels    D.w.  Tons 

Shipping  Board  for  operation^ 408  2,622,550 

Emergency  Fleet  Corporation 219  1,344,232 

Total  requisitions 627  3,966,782 

Total  as  of  December  i 450^  2,910,361 

The  seeming  discrepancy  between  the  two  totals  thus  given 
as  official  is  to  be  explained  by  the  fact  that  of  the  entire  ton- 
nage caught  in  the  requisition  net,  nearly  a  million  tons  were 
of  such  sizes  and  kinds  as  to  justify  their  release  back  to  their 
owners  under  the  requisitioning  order  of  October  ii,  191 7. 
That  left  a  little  short  of  3,000,000  tons  subject  to  this  status 
of  control  for  construction  and  operating  purposes. 

Maritime  Policy  the  Controlling  Factor 

While  it  is  questionable  as  to  whether  the  Shipping  Board 
authorities  had  good  and  sound  reasons  for  commandeering 

^  Second  Annual  Report,  U.  S.  Shipping  Board,  19 18,  p.  23. 

2  Ibid.,  p.  100,  B  (2),  including  35  ships  released,  canceled  and  transferred. 

198 


WAR  CONTRACT  OPERATIONS  1 99 

the  shipping  in  process  of  construction,  there  is  little  reason  to 
question  their  wisdom  in  taking  over  the  operating  tonnage  of 
all  classes  for  use  on  government  account.  The  one  all-suffi- 
cient reason  was  the  abnormal  freight  rate  situation,  making 
it  impossible  to  operate  shipping  under  the  conditions  exist- 
ing on  the  double  basis,  of  both  competitive  and  official  freight 
charges.  Profiteering  had  had  the  field  for  two  years  or  more, 
with  the  result  of  vast  disaster  to  the  efforts  of  exporters  to 
reach  their  markets.  Shipping  lines  abandoned  the  less  lucra- 
tive routes  for  the  more  profitable  ones.  Europe  was  thus 
served  while  sailings  were  practically  suspended  between  the 
eastern  ports  of  our  own  country  and  the  west  coast.  South 
and  Central  America  were  as  good  as  cut  off  from  our  markets, 
including  the  regular  movements  of  coffee  and  wool  from 
Brazil  and  Argentina.  After  a  careful  survey  of  the  fac- 
tors, including  freight  soaring  ever  higher,  suspended  service 
and  the  necessity  of  keeping  value  and  costs  of  services  in 
some  sort  of  reasonable  relation,  a  scheme  of  general  requisi- 
tion was  worked  out.  The  purpose  was  to  restore  this  vital 
element  in  national  efficiency  to  a  more  normal  basis,  to  secure 
fairer  distribution  of  commercial  facilities,  and  to  prevent 
private  profiteering  from  defeating  the  war  aims  of  the  gov- 
ernment. The  plan  did  not  contemplate  disturbing  the  oper- 
ative organizations  under  private  auspices  but  insured  gov- 
ernmental control  in  disposition  of  tonnage  on  public  account 
at  compensation  to  be  determined. 

The  authority  for  this  requisitioning  was  given  under  sev- 
eral statutory  provisions.  In  the  main,  however,  the  emer- 
gency shipping  fund  section,  in  the  Urgency  Deficiency  Act  of 
June  15,  1 91 7,  conveyed  the  needed  power  to  the  President.^ 
On  July  II,  by  executive  order,  this  was  delegated  to  the 
Shipping  Board,  which  obtained  control  of  operating  tonnage 
and  construction  tonnage  under  different  requisition  orders. 
For  the  former,  considerable  time  was  consumed  in  working 
out  the  principles  that  should  govern  the  relations  involved 
in  the  emergency  severance  of  ownership  and  control.     So 

1  First  Annual  Report,  U.  S.  Shipping  Board,  1917,  p.  I3- 


200  GO\"ERNMENT   WAR   CONTRACTS 

that  It  was  not  until  the  middle  of  October  that  the  general 
order  issued  three  days  before  went  into  effect,  covering  all 
steel,  power-driven  cargo  vessels  of  2,500  deadweight  tons  and 
over,  and  all  American  passengers  ships  of  like  size,  that  were 
suitable  for  ocean  service.^ 

Contractual  Arrangements  for  Requisitioned 

Ships 

In  this  discussion  interest  centers  in  the  working  agree- 
ment by  which  the  owners  and  the  government,  in  the  person 
of  the  Shipping  Board,  came  to  terms.  This  was  drawn  along 
lines  of  established  shipping  practice  and  was  submitted  to 
owners,  whom  it  obligated  to  operate  the  vessels  for  the 
United  States;  also  a  requisition  charter  was  sent,  in  which 
were  defined  the  duties  of  government  and  shipowners,  and  it 
fixed  the  requisition  rate  to  be  paid  to  owners  by  the  govern- 
ment. The  Shipping  Board  reserved  the  right  to  cancel  the 
requisitioned  agreement  at  five  days'  notice.  These  rates  of 
compensation  as  fixed  gave  to  the  owners  a  definite  and  cer- 
tain amount  per  deadweight  ton  per  month  for  cargo  vessels 
and  per  gross  register  for  passenger  ships.  The  rates  varied 
according  to  speed  for  passenger  boats  and  with  the  form  of 
charter  under  which  a  ship  operated. ^ 

Not  all  of  these  questions  of  compensation  could  be  settled 
in  advance  of  assuming  control.  The  measure  of  response 
to  the  plan  was  ample  evidence  of  confidence  and  cooperation 
on  the  part  of  the  American  shipow^ners.  By  June,  191 7, 
many  of  the  leading  companies  had  already  turned  over  their 
documents  and  charters.  Various  governmental  agencies 
assisted  in  arriving  at  an  equitable  war  time  agreement.  The 
policy  of  the  board  was  to  charge,  in  operation  of  shipping, 
the  requisition  rate,  which  was  a  sort  of  tentative  or  base  rate, 
when  that  rate  was  deemed  to  be  advisable  for  the  interests 
of  the  government,  the  Allied  governments  or  the  consuming 
public.  Otherwise  it  "charged  higher  rates  when  necessary 
to  prevent  excessive  profit  by  private  interests." 

^  First  Annual  Report,  U.  S.  Shipping  Board,  191 7,  p.  14. 

*  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  pp.  34-35. 


WAR   CONTRACT   OPERATIONS  201 

In  Operation,  two  difficulties  arose  which  are  specially 
worthy  of  note  as  relating  to  the  agreement  with  vessel 
owners.  One  was  the  absence  of  inducement  to  maintain 
efficiency  in  employment  of  tonnage  under  an  assured  return 
to  owners — a  difficulty  which  was  in  a  large  part  overcome 
by  the  Shipping  Control  Committee  of  the  Shipping  Board. 
That  kept  closer  watch  for  delays  and  had  the  allocation  of 
tonnage.  The  other  difficulty,  that  of  adjusting  all  the  finer 
questions  of  compensation  on  as  just  a  basis  as  practicable,  led 
to  the  appointment  of  the  Ocean  Advisory  Committee  on 
Just  Compensation.  This  committee  was  an  excellent  exam- 
ple of  the  method  of  enlisting  the  services  of  expert  judgment 
at  small  cost  in  settlement  of  disputed  questions  of  contract- 
ual awards.  Its  membership  of  four  included  an  ex-judge  of 
the  Supreme  Court  of  New  York,  an  insurance  expert  in 
marine  matters  and  two  marine  surveyors  and  engineers. 
Their  duties — to  recommend  the  amount  of  compensation 
deemed  to  be  just  on  vessels  to  which  title  had  been  taken, 
and  likewise  to  adjust  claims  on  requisitioned  vessels  lost 
under  risks  assumed  by  government — were  discharged  in 
holding  hearings  and  making  awards  for  fifty-nine  vessels, 
involving  a  sum  of  $26,152,675,  between  April  i  and  October 
17,  1918.1 

Control  of   Chartering   Nonrequisitioned  Ships 

A  third  difficulty  should  be  mentioned,  as  affecting  the 
compensation  for  requisitioned  ships.  Of  the  original  ship- 
ping taken  under  control  about  a  million  tons,  as  has  been 
noted,  were  released  and  returned  to  the  owners.  Among 
these  there  were  475  vessels  requisitioned  of  968,551  tons, 
some  of  a  size  below  the  minimum  tonnage  limit  of  2,500 
deadweight  tons,  also  including  vessels  released  for  operation 
by  owners  as  not  in  the  requisitioned  class. ^  This  outside 
tonnage  proved  to  be  an  undermining  influence  when  it  came 
to  maintaining  or  controlling  charges  on  freight  and  travel. 
That  gave  owners  of  government  controlled   ships,   whose 

^  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  p.  89. 
-  Ihid.,  p.  23,  Table  I. 


202  GOVERNMENT   WAR   CONTRACTS 

returns  were  limited,  an  occasion  for  complaint  on  grounds 
of  discrimination.  To  meet  this  condition,  the  Shipping 
Board  created  the  Chartering  Committee,  with  control  of  all 
charters  of  nonrequisitioned  ships  and  of  neutral  tonnage.^ 
Besides  having  the  effect  of  placing  all  American  controlled 
shipping  on  an  equal  footing  as  to  rates,  this  obliged  neutral 
shipping  to  assume  its  part  in  the  less  desirable  service  lines. 
The  effect  on  war  time  charter  rates  is  thus  described  as  of 
December  i,  1918: 

Prior  to  the  formation  of  the  Chartering  Committee,  time-charter  rates  for 
trading  between  the  United  States  and  South  America  reached  the  unprecedented 
figure  of  $13.10  per  deadweight  ton  per  month.  The  South  American  market,  so 
vital  to  us  for  its  ores,  nitrates,  copper,  etc.,  had  been  more  or  less  neglected  by  the 
foreign  owner  for  other  trades  that  yielded  still  greater  rewards,  and  the  resultant 
scarcity  of  tonnage  forced  freight  rates  on  merchandise  moving  between  the  United 
States  and  South  America  to  extreme  levels,  bringing  in  its  train  speculation  and 
manipulation  in  freight  room.  Through  gradual  reductions  in  charter  rates  and 
by  employing  means  available  to  them,  the  Chartering  Committee  succeeded  in 
bringing  a  readjustment.  Today  the  time-charter  rate  for  neutral  vessels  trading 
between  the  United  States  and  South  America  is  $8.33,  a  reduction  from  the 
former  high  level  of  more  than  36  per  cent. 

A  sufficient  amount  of  tonnage  was  diverted  to  this  market,  with  the  result  that 
there  has  been  a  constant  flow  of  importation  of  the  much  needed  commodities 
from  South  America.- 

Effects  of  Ocean  Freight  Control  on  Shipyard 

Conditions 

Although  the  relation  between  the  control  of  ocean  shipping 
rates  and  the  construction  in  private  shipyards  is  not  so  self- 
evident,  it  nevertheless  had  a  substantial  bearing  on  the 
contract  situation.  For  one  thing,  it  took  away  that  abnor- 
mal inducement  to  the  builders  to  drive  work  on  the  ways  for 
the  premiums  offered  by  profiteering  owners  of  tonnage.  It 
was  this  sense  on  the  part  of  labor  in  shipyards — that  they 
were  being  exploited  for  the  advantage  of  the  owners  and 
operators  who  were  wholly  uncontrolled — that  lay  at  the 
bottom  of  the  strike  epidemics  current  in  all  American  ship- 
building districts.  The  lack  of  control  in  freights  had  put  an 
abnormal  inflation  of  values  into  the  whole  construction  situa- 

^  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  pp.  68-69. 
^  Ibid.,  p.  70. 


WAR   CONTRACT   OPERATIONS  203 

tlon,  SO  that  nobody  who  could  build  ships  wanted  to  do 
anything  for  the  government  where,  especially  in  the  case  of 
the  navy,  a  fair  and  just  price  was  always  insisted  on  after  a 
careful  determination  of  cost  conditions.^  That  was  also  the 
Goethals  policy-  in  the  army  supply  contracts.  When  this 
element  of  riotous  boosting  of  freights  was  once  removed 
from  the  sea  as  a  field  of  investment  and  enterprise,  it  im- 
parted a  far  more  manageable  set  of  conditions  to  the  entire 
shipyard  situation.  It  served  also  as  a  forewarning  to  the 
shipbuilders  that  they  must  reckon  with  the  more  drastic 
handling  of  the  construction  resources  on  the  part  of  the 
government,  as  soon  as  the  military  and  naval  necessities  in 
the  maritime  outlook  might  call  for  the  total  subordination  of 
private  to  public  interests.  After  the  requisitioning  of  con- 
struction under  way  in  the  order  of  August  3,  191 7,-  the  order 
of  October  15,  taking  control  of  shipping,  gave  much  needed 
balance  to  the  construction  program. ^ 

Was  Requisitioning  of  Incomplete  Ships  Advisable? 

The  other  part  of  the  Shipping  Board's  requisitioning  pro- 
gram, of  taking  over  the  tonnage  under  construction  in  pri- 
vate yards,  is  to  be  considered  on  a  separate  basis.  The 
procedure  was  not  by  the  board  direct,  but  by  the  Emer- 
gency Fleet  Corporation,  which  had  charge  of  all  construc- 
tion under  the  board's  control.  By  the  corporation's  order 
of  August  3,  191 7,  444  ships  were  covered  by  the  comman- 
deering, excluding  canceled  and  released  ships,  of  2,895,848 
tons.  Of  this  total,  255  ships  of  1,596,831  tons  were  com- 
pleted by  October  i,  1918,  averaging  145,000  a  month.*  The 
government's  object  was  to  expedite  construction  and  to 
secure  unity  of  control.  It  has  been  officially  claimed  that 
this  was  achieved,  but  the  evidence  is  not  wholly  convincing. 
The  increased  output  cited  as  due  to  the  requisitioning  could, 
as  in  the  case  of  the  New  York  Shipbuilding  Corporation's 

^  Report  of  Paymaster  General  of  the  Navy,  igiS.p.  32. 

2  Annual  Report  of  Shipping  Board,  1918,  p.  116. 

3  Ibid.,  p.  34. 

*  Ibid.,  p.  117. 


204  GOVERNMENT   WAR   CONTRACTS 

record,  quite  as  well  have  resulted  from  other  causes.  And 
there  is  evidence  to  the  contrary,  that  requisitioning  ships  in 
private  yards  under  the  conditions  tended  to  hamper  rather 
than  to  help  the  tonnage  output.  The  testimony  of  Presi- 
dent Ferguson  of  Newport  News  was  to  the  pffect  that  "the 
work  has  not  been  expedited  as  a  result  of  their  taking  them 
over;  as  a  matter  of  fact,  we  would  have  finished  the  ships 
quicker  had  they  never  touched  them."i 

There  is  considerable  force  to  this  view  of  the  matter  when 
it  is  recalled  that  the  commandeering  was  followed  by  send- 
ing out  designers  to  simplify  construction  and  readapt  the 
types  to  the  shipping  needs  of  the  war  time  situation.  This 
could  not  but  upset  the  working  program  of  3^ards  having 
requisitioned  ships  in  process  of  building.  It  likewise  reop- 
ened the  question  of  contractual  relations. 

On  this  phase  of  the  subject  there  is  much  evidence  that 
the  Emergency  Fleet  Corporation  in  some  respects  unsettled 
rather  than  unified  the  situation.  In  a  given  yard,  one  of 
the  largest  on  the  Delaware,  there  were,  for  instance,  on  their 
ways  say  twelve  ships,  most  of  which  had  been  contracted 
for  at  prices  prevailing  prior  to  the  advances  of  wages  and 
prices  and  freight  rates  to  war  record  levels.  If,  for  instance, 
the  greater  portion  of  these  vessels  were  contracted  for  at 
$60  a  ton,  and  those  later  contracted  for  at  $160  a  ton,  the 
profits  on  the  later  lot  had  to  be  made  to  offset  the  losses  on 
the  earlier  contracts,  ^^'hen  the  government  came  in  with 
its  commandeering  order,  it  delayed  or  postponed  settlement 
as  long  as  six  months  in  some  cases,  leaving  the  builders  in  a 
state  of  uncertainty  as  to  what  the  terms  of  compensation 
were  to  be. 

On  the  other  hand,  the  corporation's  control  over  supplies 
of  materials,  over  labor  conditions  and  over  the  foreign 
owned  tonnage-  made  for  better  results  under  a  unified  pro- 
gram of  ship  construction.  Public  interests  and  private 
efforts  to  seize  the  harvest  of  great  profits  had  in  some  way 

^  Hearings  on  Senate  Resolution  170,  Vol.  I,  p.  592. 
^  Annual  Report  of  Shipping  Board,  1918,  p.  116. 


WAR   CONTRACT   OPERATIONS  2O5 

to  be  brought  under  a  single  policy.  In  the  case  above  cited, 
the  newer  yards,  which  began  with  high  priced  contracts, 
say  at  $300  a  ton  in  some  cases,  simply  robbed  the  yards  in 
which  contracts  were  being  filled  at  $60,  by  paying  fantastic 
advances  in  wages.  Out  of  this  chaos  commandeering 
brought  some  sort  of  order  by  allocating  labor,  material  and 
equipment. 

It  can  not  be  said  that  a  commandeering  order  was  neces- 
sary for  the  control  of  that  part  of  foreign  contracts  on  Amer- 
ican shipways  placed  by  British  shipping  interests.  This 
comprised  nearly  a  million  tons  and  its  transfer  to  the  Fleet 
Corporation  for  completing  was  obtained  by  negotiation 
between  Chairman  Denman  of  the  Shipping  Board  and  Mr. 
Balfour,  May,  1917.  His  offer  to  return  the  tonnage  to  the 
American  flag,  to  assent  to  its  being  taken  over  by  our  gov- 
ernment at  the  contracted  prices,  was  accepted.^  On  the 
part  of  the  Norwegian  ships  in  process  of  building  here  there 
was  less  willingness.  The  ocean  freight  situation  was  far 
too  enticing  to  owners  of  prospective  tonnage  to  be  easily 
bereft  of  their  boats  in  which,  by  carrying  coal  to  Italy,  for 
instance,  they  could  get  (July,  191 7)  $40  to  $70  a  ton,  com- 
pared with  a  prewar  rate  of  $6  a  ton.  It  was  probably  these 
very  conditions,  of  bleeding  the  European  purchasers  of 
munitions,  materials  and  food  supplies,  by  profiteering  prices 
and  freight  rates  that  at  bottom  justified  this  commandeering 
policy. 

The  requisition  of  the  operating  tonnage  really  required 
the  commandeering  of  the  construction  tonnage  as  a  logical 
sequence  in  the  policy  to  control  the  ocean  freight  situation. 
That  had  become  wholly  demoralizing  in  its  effects  prior  to 
the  advent  of  the  Shipping  Board  into  that  field.  As  a  mat- 
ter of  expediting  construction,  the  prices  for  finished  vessels 
were  so  abnormally  high  as  to  cause  builders  to  finish  their 
ships  at  the  earliest  practicable  moment,  had  they  been  able 
to  get  steel,  labor  and  equipment  without  government  aid. 
Ships  were  then  worth  three  or  four  times  what  they  were 

1  Hearings  on  Senate  Resolution  170,  Vol.  I,  p.  1073. 


206  GOVERNMENT   WAR   CONTRACTS 

before  the  war  and  charter  rates  had  risen  to  a  thousand  per 
cent  over  what  they  were  in  the  earher  half  of  19 14.  The 
fact  was,  also,  that  some  of  the  private  shipbuilding  concerns 
were  loath  to  work  on  government  account,  because  of  the 
higher  prices  obtainable  on  commercial  account.  Midsum- 
mer of  191 7  saw  the  turn  of  the  tide  when  the  requisitioning 
of  the  ships  in  shipyards  took  effect.  Of  the  tonnage  there, 
over  90  per  cent  consisted  of  cargo  and  oil  tankers,  so  largely 
had  the  supplying  of  Europe  with  materials  and  manufac- 
tures become  dependent  on  this  country  as  to  practically 
preempt  American  yards. ^ 

Reverting  to  the  original  order  for  commandeering  the 
hulls  and  materials  of  steel  shipping  in  process  of  construction, 
the  restatement  of  the  corporation's  policy  will  show  how 
broad  a  bnsis  w^as  being  laid  for  the  command  over  construc- 
tional resources.  The  report  of  191 8  thus  formulates  the 
comprehensive  plan  of  action,  in  the  execution  of  which  it 
stopped  far  short  of  its  great  opportunity  to  organize  a  broad- 
gauged  shipbuilding  policy  on  the  basis  of  the  existing  facili- 
ties. The  commandeering  policy,  although  somewhat  objec- 
tionable in  method  and  too  limited  in  extent,  was  sound  in 
principle,  as  stated  herewith: 

The  purposes  of  this  commandeering  order  were  to  secure  to  the  United  States  a 
tonnage  which  otherwise  would  have  gone  very  largely  into  foreign  ownership;  to 
expedite  construction  by  simplifying  the  designs  of  many  of  these  ships;  to  prevent 
interference  by  these  ships  with  others  which  the  corporation  purposed  to  con. 
struct;  to  acquire  control  over  the  American  shipbuilding  industry,  which  could 
not  be  acquired  except  by  having  direct  relations  with  the  shipbuilders;  and  to  be 
in  a  position  at  all  times  to  allocate  material  and  equipment  between  these  ships 
and  others.  At  the  time  of  the  commandeering  order  practically  all  of  the  avail- 
able shipbuilding  capacity  of  the  country  was  taken  up  either  in  the  building  of 
ships  for  the  navy  or  in  building  these  commandeered  ships.  These  ships  were  in 
various  stages  of  incompleteness,  and  in  some  cases  only  a  few  materials  had  been 
acquired  by  the  builder.^ 

Commandeering  as  an  Emergency  Shipyard  Policy 

Here  is  where  the  Shipping  Board  and  its  corporation  missed 
one  main  chance,  in  not  planning  for  a  larger  expansion  of 

'  Annual  Report  of  Shipping  Board,  1918,  p.  100 
"^  Ibid.,  p.  116. 


WAR    CONTRACT    OPERATIONS  207 

capacity  In  the  requisitioned  yards.  Some  of  the  private 
yards  were  practically  clear  for  acceptance  of  fresh  orders. 
Probably  more  of  them  had  ships  nearing  the  later  stages  of 
completion.  There  were  vast  possibilities  of  doubling  or 
trebling  the  number  of  ways  in  the  existing  shipbuilding 
plants,  as  the  situation  presented  itself  in  the  midsummer  of 
191 7.  The  government,  it  would  seem,  could  have  thrown 
its  organizing  talent,  its  vast  financial  resources  and  its  abso- 
lute control  over  facilities,  materials  and  manufacturing  indus- 
tries of  all  related  classes  in  this  direction,  of  supplementing 
private  yards,  with  vastly  more  hope  of  success  in  speedy 
production  of  tonnage  than  it  obtained  by  the  pursuit  of  the 
fabricating  shipbuilding  program. 

Not  only,  then,  was  the  commandeering  of  shipbuilding 
advisable  as  a  matter  of  self-protection  to  the  government's 
purposes ;  It  was  Indeed  the  open  door,  the  only  open  door  to  a 
constructive  program  based  on  the  common  sense  conception, 
that  if  you  want  anything  done  and  done  right  and  quickly, 
do  not  go  to  outside  people  who  bring  you  a  new  trick,  but  go 
to  those  w^ho  have  done  work  in  that  line  before.  In  other 
words,  those  who  have  built  ships  all  their  lives  were  the 
"know-hows"  to  which  logically  recourse  should  have  been  had. 
Instead  of  that,  these  possibilities  of  cooperation  with  gov- 
ernment were  only  partly  utilized;  the  shipbuilding  Industry 
in  existence  was  placed  almost  In  a  status  of  arrest,  and  treated 
niggardly  in  the  later  distribution  of  orders  from  the  govern- 
ment. The  tardiness  with  which  accounts  were  settled  in 
compensation  claims  hindered  generally  the  operations  of 
commandeered  vessel  building. 

One  of  the  misconceptions  regarding  the  private  shipbuild- 
ing situation,  between  the  beginning  of  the  war  and  the  date 
of  commandeering,  is  the  current  statement  that  these  plants 
were  indisposed  to  cooperate  with  the  government  on  any 
such  a  policy  as  w^ould  involve  putting  their  facilities  at  the 
service  of  the  government,  This  is  probably  in  direct  opposi- 
tion to  the  fact.  Shipbuilders  were  quite  as  ready  to  serve 
their    government    as    any   other    craft.     The    government 


208  GOVERNMENT  WAR   CONTRACTS 

never  seemed  to  realize  that  the  American  ship  constructing 
capacity  was  a  quickly  expansible  instrument,  if  properly  ap- 
proached and  handled.  The  unresponsiveness  of  the  govern- 
ment is  probably  represented  in  the  well  known  incident  of 
the  offer  to  the  government  at  the  outbreak  of  war  of  the  full 
facilities  of  a  shipbuilding  concern  then  constructing  40  per 
cent  of  the  tonnage  building  in  this  country.  Not  so  much  as 
an  acknowledgement  of  the  offer  was  received  for  weeks  after, 
at  the  hands  of  the  officials  of  the  department  to  which  the 
tender  was  made. 

Under  these  circumstances  the  government  approached  the 
tonnage  problem  with  totally  inadequate  appreciation  of  the 
possibilities  of  the  industry  as  the  war  found  it.  The  Navy 
Department  was  in  control  of  the  field  to  the  extent  of  utiliz- 
ing 70  per  cent  of  the  shipyard  capacity.  Had  the  Navy 
Department,  the  Shipping  Board  and  the  Fleet  Corporation 
joined  with  the  existing  shipyards  of  the  country,  they  could 
have  had  little  if  any  possible  need  of  going  after  newly  con- 
trived expedients  based  on  large  scale  experiments  in  the 
quantity  production  of  standardized  steel  tramp  ships. 
Aside  from  the  moral  effect  of  these  vast  undertakings,  the 
fabricated  yards,  by  their  priorities  over  materials  and  labor 
which  the  established  shipyards  might  have  used,  were  a 
hindrance  rather  than  a  help  in  winning  the  war. 


CHAPTER    XX    . 

Contractors'  Fees  in  Fabricated  Shipbuilding 

Of  the  twelve  so-called  fabricated  shipyards,  all  were  in  the 
east.  These  were  government  agency  plants  erected  at 
public  expense  to  construct  and  equip  standardized  types  of 
large  steel  ships.  The  materials,  machinery  and  equipments 
were  manufactured  elsewhere  on  orders  distributed  among  as 
many  as  3,500  outside  plants  in  various  parts  of  the  country. 
From  these  many  places  of  manufacture  the  requisites  of 
shipbuilding  were  shipped  in  to  the  fabricated  yards,  where 
the  assembling,  erecting  and  equipping  were  done  under  the 
direction  of  the  Emergency  Fleet  Corporation,  the  owner, 
and  the  second  party  to  the  contract.  The  other  party  was 
the  contracting  agent,  who  agreed  to  construct  and  operate 
the  fabricating  yards  at  a  certain  fee,  amounting  to  a  given 
percentage  of  the  cost  of  ship  production.  The  govern- 
ment was  to  pay  the  cost,  including  labor  and  materials  and 
overhead.^  The  contractor  was  selected,  supposedly,  for 
his  capacity  to  handle  large  scale  undertakings.  The  fee 
awarded  was,  within  definite  limits,  conditional  on  the  agent's 
ability  to  execute  the  operations  within  scheduled  time,  vary- 
ing with  his  success  in  controlHng  costs  and  expediting  work. 
His  work  included  the  negotiation  of  contracts  with  outside 
firms,  the  preparation  of  plans  and  specifications  to  be  ap- 
proved by  the  Fleet  Corporation.  The  agent  was  to  insure 
the  delivery  of  materials,  machinery,  etc.,  to  erect  shipyard 
facilities  and  to  construct  and  fit  out  vessels  to  the  extent  of 
several  hundred,  varying  in  size  from  5,000  to  9,000  dead- 
weight tons.  The  Hog  Island  contract,  for  instance,  called 
for  delivery  of  25  cargo  ships  within  13^  months  after  signing 

1  Hearings  on  Senate  Resolution  170,  Vol.  I,  pp.  276-278:   Abstract  of  Hog 
Island  Contract. 

209 


210  GOVERNMENT   WAR   CONTRACTS 

of  the  contract  on  September  13,  1917;  25  more  within  i8| 
months;  25  of  the  type  known  as  the  troop  vessels  within  15 
months,  25  within  20  months,  and  20  within  22  months, 
making  120  vessels  in  all.^  Referring  to  this  contract,  the 
contractor,  in  the  president's  report  to  the  stockholders, 
April  3,  1 91 8,  says  of  the  compensation: 

The  contract  does  not  provide  that  the  agent  shall  receive  remuneration  for  the 
work  of  designing  and  constructing  the  yard.  It  is  to  receive  a  fixed  fee  for  its 
services  in  constructing  each  ship,  one-half  payable  when  such  ship  is  half  built, 
the  remainder  when  the  ship  is  completed  and  accepted  by  the  United  States 
Government.  No  remuneration  whatever  except  this  fixed  fee  per  ship  is  to  be 
paid  to  the  American  International  Corporation  or  to  its  associates,  Messrs. 
Stone  &  Webster  and  the  New  York  Shipbuilding  Corporation.  For  the  purpose 
of  carrying  out  this  contract,  the  American  International  Corporation  formed  as 
its  operating  unit  the  American  International  Shipbuilding  Corporation.  It  en- 
gaged the  expert  services  of  the  New  York  Shipbuilding  Corporation  and  of  Messrs. 
Stone  &  Webster  and  has  agreed  to  pay  for  those  services  out  of  the  fee  which  it 
expects  to  receive.  The  men  entirely  engaged  upon  the  job,  whether  taken  from 
the  organization  of  Stone  &  Webster,  or  any  other  organization,  enter  the  govern- 
ment employ  at  salaries  approved  by  the  government  officials  and  become  regular 
employes  of  the  Emergency  Fleet  Corporation. 

The  essence  of  the  contract  is  time.  Speed  is  to  be  the  controlling  factor  in  the 
work.  Practically  everything  is  to  be  subordinated  to  this  and  the  contract  signed 
by  the  government  so  states. 

The  importance  of  speed  in  construction,  which  was  from  the  first  present  in  the 
minds  of  all  concerned,  may  be  seen  from  the  fact  that  it  was  represented  to  us 
that  the  commercial  value  alone  of  the  use  of  the  ships  under  order,  based  on  the 
present  government  chartering  rates,  amounted  to  $9,000,000  per  month,  so  that 
if  two  months'  time  could  be  gained  in  the  construction  of  the  yard  and  in  the 
building  of  the  ships,  this  would  in  itself  mean  a  direct  financial  saving  of 
$18,000,000  to  the  government. 

This  contract  has  been  criticised  from  two  main  points  of 
view.  On  the  one  hand  it  has  been  alleged,  without  good 
reason,  that  the  fee  method  of  paying  the  operating  agent 
corporation,  although  ostensibly  only  5  per  cent  on  the  esti- 
mated cost  of  the  vessel,  was  by  means  of  rentals,  deprecia- 
tion, premiums,  etc.,  actually  twice  that  rate,  or  over  10  per 
cent  plus  cost — a  rate  of  compensation  which  had  been  con- 
demned as  excessive  in  the  case  of  cantonment  construction 
for  the  War  Department. 

^  May  7,  1918,  this  contract  was  extended  to  include  60  more  vessels,  making 
180  in  all.    See  Second  Annual  Report  of  Shipping  Board,  1918,  p.  131. 


WAR   CONTRACT   OPERATIONS  211 

Criticism  of  Agency  Compensation  System 

A  simple  calculation  will  show  the  force  of  this  criticism. 
The  cargo  ships  in  question  bore  an  estimated  cost  of  $i,ioo,- 
ooo,^  5  per  cent  of  which  would  give  the  agent  a  fee  of  $55,000 
per  vessel.  On  that  same  vessel,  if  he  brought  the  actual 
cost  as  much  as  $150,000  under  the  estimated  base  cost  of 
$1,100,000  the  agent  received  one-third  of  this  saving;  and 
again  if  he  expedited  the  delivery  so  as  to  complete  the  vessel 
ahead  of  schedule,  he  earned  $300  for  each  day  gained,  up  to 
$14,000  as  the  utmost  premium  on  early  delivery.  Adding 
these  sums  together  we  get,  instead  of  the  simple  5  per  cent 
fee  on  $1,100,000,  or  $55,000  on  each  vessel,  $119,000,  or  10.8 
per  cent  on  the  estimated  cost.  Similar  results  are  derivable 
on  the  troop  vessels,  in  which  seventy  vessels  the  premiums 
for  early  delivery  and  damages  for  delay  were  limited  to 
$17,500  per  vessel — a  limit  not  found  in  the  first  fifty  ships. 

It  is  obviously  true  that  this  system  of  compensation 
doubled  the  winnings  of  the  contracting  agent,  as  compared 
with  the  normal  fee.  On  the  other  hand  it  has  to  be  judged 
from  the  viewpoint  of  its  bearing  on  the  government's  side  of 
the  account.  The  object  of  making  the  fee  conditional  on  the 
contracting  agent's  capacity  to  speed  the  deliveries  made  for 
the  advantage  of  the  owner.  That,  indeed,  was  the  essence 
of  the  contract — that  all  else  should  be  subordinated  to  speed, 
and  the  government  was  perfectly  willing  to  pay  for  it.  No 
fault  could  be  found  with  the  premiums  on  early  deliveries  or 
penalties  for  failure,  if  proper  limits  were  drawn.  The  other 
great  weakness  of  all  contract  arrangements,  other  than  the 
lump  sum  contract,  was  the  tendency  to  excessive  costs. 
How  to  make  it  to  the  interest  of  the  contractor  to  keep  costs 
down  without  losing  in  speed  of  construction  progress,  was 
really  the  crux  of  the  whole  contract  problem.  Besides  the 
positive  inducement  of  premiums  and  participation  in  savings, 
to  the  extent  of  one-third  of  the  reduction  below  the  esti- 

1  For  List  of  Contracts  for  Ships,  including  costs,  etc.,  see  Investigation  of  U.  S. 
Shipping  Board  Emergency  Fleet  Corporation,  by  U.  S.  Senate  Committee  on 
Commerce,  65th  Cong.,  2d  Sess.,  on  Senate  Resolution  170,  Vol.  I,  pp.  114-121. 

15 


212  GOVERNMENT   WAR   CONTRACTS 

mated  basis,  there  was  a  negative  prevention.  This  con- 
sisted in  the  penalty  of  cutting  down  the  normal  fee  by  what- 
ever amount  or  proportion  thereof  the  actual  exceeded  the 
estimated  cost,  by  charging  against  the  agent's  fee  losses  due 
to  the  agent's  neglect  or  mismanagement,  and  by  a  possible 
deduction  of  $14,000  a  vessel  delayed  beyond  the  date  of 
delivery,  at  the  rate  of  $300  to  $500  a  day  of  delay.  These 
deductions  from  the  normal  fee  can  not  go  beyond  the  limit 
of  $41,000  as  the  fee  to  be  counted  on  for  each  of  the  fifty  car- 
go boats  and  $65,000  for  the  troop  vessels.  The  agent's  com- 
pensation may  be  greater  or  less  as  he  reduces  or  enhances  the 
total  cost  and  as  he  expedites  or  delays  delivery.  If,  for 
example,  the  agent  runs  the  cost  of  the  cargo  ship  up  to 
$1,110,000,  he  loses  one-half  of  $10,000  from  his  normal  fee 
of  $55»ooo;  and  if  he  is  ten  days  late  in  delivery  he  loses 
$3,000  more,  bringing  his  fee  for  that  ship  down  to  $42,000. 
The  limit  of  such  deductions  and  penalties  is  $41,000,  so  that 
on  this  supposition  he  is  near  his  limit.  At  the  limit  of  $41 ,000 
his  rate  of  fee  would  be  only  3.7  per  cent.^ 

Compared  with  cantonment  and  camp  contracts  this  ship 
contract  is  not  far  out  of  the  line.  Some  of  the  smaller 
cantonment  jobs  worked  out  on  the  cost  plus  10  per  cent;  but 
they  were  the  exception,  especially  after  things  got  started. 
Some  of  the  larger  ones,  on  the  other  hand,  yielded  the  cost- 
plus  contractor  as  low  as  2.2  per  cent.^  In  this  case  the  unit  of 
comparison  is  the  camp  job  with  the  individual  vessel,  of 
course.  As  a  matter  of  fact,  the  fabricated  yard  contracts,  in 
the  case  of  Hog  Island  work,  yielded  the  agents  between  3  and 
7f  per  cent  on  cost.^ 

Selling  Government  Its  Own  Achievements 

This  rate  of  fee  is  considerably  lower  than  that  mentioned 
by  the  representatives  of  the  American  International  Ship- 
building Corporation  when  it  first  took  up  the  matter  with  the 

1  See  Agent's  Fees,  Article  XX  of  the  Contract. 

*  War  Expenditures  Hearings,  Ser.  II,  part  2,  p.  115.     Testimony  of  Gen.  R.  C. 
Marshall. 

'Second  Annual  Report,  U.  S.  Shipping  Board,  December  i,  1918,  p.  12. 


WAR   COXTRACTS   OPERATION  213 

Fleet  Corporation's  general  manager,  General  Goethals. 
Harris  G.  H.  Connick,  \ice  president  of  the  would-be  contract- 
ing corporation,  said,  in  testimony  on  this  matter  later: 

We  talked  this  contract  over.  We  discussed  the  fee — 10  per  cent — a  contract 
on  a  ID  per  cent  basis. 

Senator  Nelson:  It  did  not  contemplate  that  your  company  was  to  invest 
a  penny  of  its  own,  did  it? 

Mr.  Connick:  Not  a  cent;  we  were  going  to  invest  our  reputation.  He 
(Goethals)  was  to  finance  it;  he  was  to  provide  the  money  to  build  that  yard;  and 
we  were  to  bring  together  the  organization  and  develop  the  scheme  and  put  this 
thing  over. 

Senator  Nelson:     But  you  had  the  organization  already,  had  you  not? 

Mr.  Connick:  Yes;  but  that  organization  was  engaged  on  other  work.  We 
had  to  take  it  from  that  other  work;  we  were  all  working  and  busy. 

Senator  Nelson:  Well,  what  became  of  the  other  job  then,  when  you  took 
all  the  men  away  from  that? 

Mr.  Connick:  We  did  not  take  all  the  men  away  from  that.  .  .  .  We 
discussed  this  contract,  and  settled  upon  these  points.  He  (Goethals)  said  he 
wanted  200  ships,  and  he  wanted  them  in  eighteen  months,  and  he  wanted  7,500- 
ton  ships.  .  .  .  We  got  in  touch  with  Mr.  Ferris,  who  had  been  cooperating 
with  us;  and  he  prepared  the  general  design  of  the  ship,  showing  just  what  it  would 
be  like.^ 

It  is  to  be  noted  that  Mr.  Ferris  referred  to  here  was  then 
the  naval  architect  and  consulting  engineer  drawing  a  salary 
under  appointment  of  General  Goethals,  in  the  employ  of  the 
Emergency  Fleet  Corporation.  His  services  for  the  Fleet 
Corporation,  which  the  would-be  contracting  agent  had  also 
called  in,  included  the  passing  upon  and  approval  of  plans  and 
specifications  for  approximately  i,ooo  ships  of  a  total  value  of 
nearly  $1,000,000,000.  So  far  as  naval  architecture,  in  the 
designing  and  supervision  of  construction  plans  for  shipbuild- 
ing was  concerned,  the  Fleet  Corporation  had  no  need  of  going 
to  an  organization  which  was  In  the  market  to  sell  its  "reputa- 
tion on  a  10  per  cent  basis."  The  government  had  already 
developed  what  the  Fleet  Corporation  was  preparing  to  pro- 
duce; and  the  would-be  contracting  concern,  instead  of  bring- 
ing, it  is  alleged,  anything  worth  purchasing  to  the  govern- 
ment, was  gathering  from  the  government  the  very  ideas  and 
plans  which  it  sought  to  sell  at  10  per  cent  on  the  job's  cost. 

'1  Hearings  on  Senate  Resolution  170,  Vol.  H,  p.  i960. 


214  GO\'ERNMENT    WAR   CONTRACTS 

Every  essential  feature  which  Mr.  Connick  and  his  organiza- 
tion represented  as  desirable  for  the  Fleet  Corporation  to  buy, 
had  either  been  worked  out  in  the  Goethals  contracts  for  the 
two  other  fabricating  shipyards  or  was  already  developed  in 
more  or  less  available  form  in  the  Emergency  Fleet  Corpora- 
tion's plans  if  not  in  the  naval  auxiliary  ship  designs  of  the 
Navy  Department.  At  the  two  yards  referred  to,  the  Sub- 
marine Boat  Corporation  at  Newark  had  begun  on  the  fabrica- 
tion of  the  5,000-ton  type  of  ships,  and  the  Merchant  Ship- 
building Corporation  at  Bristol  had  agreed  to  begin  on  or 
had  already  arranged  with  General  Manager  Goethals  to  build 
a  large  number  of  the  9,000-ton  type  of  ship^  for  which  com- 
plete plans  were  in  existence.  After  consultation  with  these 
shipbuilding  concerns,  and  drawing  on  the  resources  of  the 
Emergency  Fleet  Corporation  for  the  essential  ideas,  this 
contract  seeking  organization  with  a  "reputation"  to  sell, 
appeared  to  have  developed  in  conference  with  General 
Goethals  a  tentative  agreement  to  supervise  the  construction 
of  fabricated  parts  of  standardized  ships  costing  $200,000,000, 
at  a  fee  amounting  to  between  $12,000,000  and  $15,000,000.2 

Hog  Island  "Know-How" — Square  Deal  or  Gold  Brick? 

When  this  provisional  agreement  between  the  Fleet  Cor- 
poration's general  manager  and  the  American  International 
Corporation  was  submitted  to  the  Shipping  Board  for  review 
and  ratification,  about  the  middle  of  July,  the  fee  seemed  to 
some,  especially  the  president  of  the  board,  Mr.  Denman,  to 
be  unduly  large  in  view^  of  the  fact  that  fully  half  of  the  work 
to  be  done  must  be  contracted  for  in  plants  and  places  wholly 
apart  from  the  fabricating  plants  and  finished  ready  for  as- 
sembling in  the  fabricating  yards.  It  was  held,  therefore, 
that  this  outside  work  for  which  subcontractors  received  a  fee 
of  5  per  cent  on  cost,  was  not  at  all  under  the  supervising 
services  of  the  contracting  organization.  On  this  point  the 
testimony  of  Mr.  Denman  is  explicit: 

1  Hearings  on  Senate  Resolution  170,  Vol.  II,  p.  1959. 

2  Ibid.,  p.  2429. 


WAR    CONTRACT    OPERATIONS  215 

What  made  my  associates  and  myself  in  the  Shipping  Board  hesitate  and  ask 
for  further  figures  was  this:  We  could  not  see,  as  we  talked  with  Mr.  Connick, 
that  we  were  to  get  out  of  this  group  of  corporations  anything  more  than  the 
"know-how,"  and  that  phrase  was  used  at  that  time — of,  perhaps  half  a  dozen 
men;  that  this  enterprise  was  a  completely  new  creation,  in  which  the  government 
furnished  the  basic  idea  of  fabrication,  all  of  the  capital,  paid  all  the  salaries, 
except  for  these  few  supermen  that  were  to  be  put  into  a  new  organization — and 
furthermore,  it  was  to  furnish  it  commandeering  power,  so  that  what  even  the 
greatest  organizations  of  capital  themselves  could  not  do,  this  group  of  five  men 
would  be  able  to  do;  they  could  stop  the  flow  of  steel  to  other  places  and  divert 
it  to  this  place;  they  could  use  the  government  pressure  on  labor  and  they  were 
to  have  every  assistance  that  the  government,  with  all  of  its  war  powers,  could 
give  them.  And  that  was  to  be  part  of  the  bond  that  we  were  to  give  the  Vanderlip 
group,  through  Mr.  Connick's  agency;  $12,000,000  for  supervising  an  estimated 
$125,000,000  worth  of  work,  where  the  plant  is  owned  by  the  contractor,  and  the 
scheme  is  furnished  by  the  contractor,  and  the  running  capital. is  furnished  by  the 
contractor,  is  one  thing;  but  that  figure,  for  the  job  in  this  case,  seemed  to  us  open 
to  question. 

Out  of  this  position  of  the  Shipping  Board,  the  unfortunate 
controversy  betweenthe  president  of  that  body  and  the  general 
manager  of  the  Fleet  Corporation  soon  came  to  a  head — over 
the  question  of  the  propriety  of  the  Hog  Island  contract  fee — 
as  to  the  award  for  50  of  the  steel  ships  with  the  option  of 
making  it  120  later.  It  seemed,  in  the  judgment  above  quoted, 
that  this  proposal  amounted  simply  to  a  scheme  to  sell  to  the 
government  its  own  ideas,  plans  and  specifications,  such  as  it 
had  already  planned  to  embody  in  two  shipbuilding  plants 
under  operation.  It  was  so  unusual  a  procedure  in  its  terms 
and  assumptions  as  to  entitle  it  to  be  questioned  before  giving 
it  to  the  country  as  a  consummation  of  the  government's 
foresight  or  insight  or  bargaining  capacity.  The  attitude  of 
the  president  of  the  Shipping  Board  was  thus  expressed: 

They  were  to  supervise  the  building  of  the  plant.  But  as  to  that  you  will  find 
— 'and  I  will  later  insert  in  the  record  a  letter  that  I  have  from  General  Goethals — 
that  entire  plan  had  been  worked  out  before  the  contract  had  been  entered  into. 
We  had  already  designed  the  ships  ourselves,  through  our  own  employes. 

The  letter  above  referred  to  was  dated  July  13,  191 7,  just 
two  months  before  the  Hog  Island  contract  was  signed  between 
the  Fleet  Corporation  and  the  American  International  Cor- 
poration. In  it  General  Goethals  had  stated  that  within  the 
next  three  days  he  would  award  two  fabricated  steel  ship- 
building contracts  (Bristol  and  Newark)  for  400  ships  with  an 


2l6  GOVERNMENT   WAR   CONTRACTS 

aggregate  tonnage  of  2,500,000  tons,  to  be  completed  within 
eighteen  to  twenty-four  months,  the  contracting  companies 
to  get  6  per  cent  of  the  total  cost  of  the  work.  The  plants 
were  to  be  government  owned,  the  government  was  to  have 
the  benefit  of  fixed  commodity  prices  at  the  government 
schedule  and  the  designs  of  the  ships,  the  plans  of  the  yards 
and  the  distribution  of  the  work  of  furnishing  materials  and 
the  fabricated  parts  had  been  arranged  by  the  various  con- 
tracting agencies  at  the  service  of  the  Emergency  Fleet 
Corporation — without  Mr.  Connick's  aggregation  of  "know- 
hows." 

Speed  was  the  dominating  consideration,  controlling  every 
relation.  The  next  in  order  was  the  avoidance  of  unnecessary 
wastefulness.  The  contractor,  in  the  Hog  Island  project,  gave 
ample  proof  in  the  course  of  this  herculean  task  of  his  purpose 
to  subordinate  his  own  profits  in  order  to  make  the  project  a 
success.  Of  course,  having  been  assured  of  a  minimum  fee 
as  compensation,  he  was  in  position  to  concentrate  his  efforts 
on  executing  the  program  on  schedule  time.  On  the  first 
fifty  ships  contracted  for,  it  may  be  doubted  if  he  came  out 
even.  The  last  of  them  was  delivered  on  October  6,  191 9, 
although  due  March  28,  191 9.  He,  however,  soon  exercised 
his  option  (October  23,  191 7)  of  contracting  for  70  more,  and 
later  (May  7,  1918)  added  60  additional,  making  180  ships  to 
be  built  at  Hog  Island  by  this  one  contract.^  His  fees  were 
agreed  upon  as  follows: 

SHIPS,  COSTS  AND  FEES  PAID  HOG  ISLAND  CONTRACTORS  AS 

REPORTED   BY   MR.   PIEZ,  DECEMBER  19,  19182 

Number  and  Class           Total  Estimated  Normal  Fee  to         Minimum  Fee 

of  Ships                     Cost  to  Gov-  Contractor             to  Contractor 

ernment 

50  ships— class  A $65,000,000  $2,750,000                $2,050,000 

70  ships— class  B 115,500,000  5.775.000                  4,550,000 

Total $170,500,000  $8,525,000  $6,600,000 

60  additional  ships^ 85,000,000  3,150,000  2,310,000 

Grand  total $256,000,000  $11,675^00  $8,910,000 

1  The  cancelation  of  the  70  ships  contracted  for  October  23,  1917,  all  troop  and 
cargo  ships  combined,  was  announced  in  November,  1919. 

2  Hearings  on  Senate  Resolution  170,  December  19,  1918,  Vol.  IV,  pp.  21-22: 
Testimony  of  Charles  Piez. 

*  Dates  of  contracts:   50  ships,  September  13,  1917;  70  ships,  October  23,  1917; 
60  ships,  May  7,  1918. 


WAR   CONTRACT   OPERATIONS  217 

Although  these  fees  range  between  3.5  and  4.5  per  cent,  in 
the  aggregate,  they  created  the  impression  in  popular  thought 
of  being  gained  under  conditions  that  did  not  give  the  gov- 
ernment a  square  deal.  This  probably  came  from  the  few 
instances  of  inordinate  salaries  paid  to  people  commercially 
known  to  be  incapable  of  earning  any  such  money.  Corre- 
spondence of  Congressmen  with  constituents  indicated  wide- 
spread belief  in  padding  of  salary  and  cost  sheet  rolls. 
Wastefulness  and  overloaded  payrolls,  prior  to  Rear  Admiral 
Bowles's  report,  no  doubt  helped  to  swell  fees  as  well  as  costs. 

Comparative  Fees  at  Three  Fabricating  Yards 

Failure  on  the  part  of  the  largest  of  the  fabricating  agencies 
to  command  the  confidence  of  the  country,  whether  in  its 
methods,  its  good  faith  in  negotiating  and  interpreting  its 
contract  or  in  its  results,  does  not  necessarily  call  into  ques- 
tion the  fabricating  principle  as  carried  out  elsewhere.  At 
the  other  large  fabricating  plants — the  Submarine  Boat 
Corporation  at  Newark  or  the  Merchant  Shipbuilding 
Corporation  at  Bristol — there  was  at  least  the  nucleus  of  a 
shipbuilding  organization.  That  was  not  the  case  at  Hog 
Island.  At  the  Newark  plant  an  established  yard  had  been 
building  submarine  chasers  with  substantial  success  before 
entering  into  the  contract  for  the  addition  of  a  completed 
yard  of  twenty-eight  ways  at  an  outlay  of  $17,000,000,  with 
a  fee  of  about  6  per  cent  on  the  ship's  costs,  not  including  any 
fee  on  the  yard.  There  was  a  staff  of  shipbuilders  with  which 
the  government  was  dealing.  They  M'ere  masters,  not  ama- 
teurs, in  their  art.  They  sold  to  the  government  a  demon- 
strated service,  not  a  theory  or  an  experiment.  They  laid 
their  first  keel  ninety-three  days  after  the  date  of  the  con- 
tract. At  the  Merchant  Company's  3^ard  there  was  a  design- 
ing and  engineering  staff  identified  with  the  plant,  which  was 
also  in  position  to  assume  a  contract  as  a  going  shipbuilding 
company  out  of  its  organization.  It  was  really  the  first  of  the 
three  to  bring  completed  fabricated  ship  plans  to  the  Fleet 
Corporation.  It  organized  its  own  shop  capacity  to  fabricate 
about  15  per  cent  of  the  material  within  the  yard.     It  had 


2l8  GOVERNMENT   WAR   CONTRACTS 

the  established  connections  for  handling  within  the  trade, 
as  if  by  an  annex  to  its  own  Chester  Shipbuilding  Company, 
the  work  of  the  forty  9,000-ton  ships  on  the  twelve  ways 
which,  with  yards  and  shops,  were  to  cost  $12,000,000.  Both 
of  these  shipbuilding  concerns  took  their  contracts  as  an 
extension  of  an  existing  organization  within  the  trade.  Con- 
sequently they  did  the  work  without  overpaid  publicity 
agents  misleading  the  public  or  attempting  to  convince  the 
public  that  it  would  ultimately  get  good  money  out  of  a 
construction  engineering  adventure  into  the  shipbuilding 
trade  and  industry.  It  must  be  admitted  that  later  achieve- 
ments helped  to  confirm  this  view. 

These  three  principal  fabricating  plants  received  substan- 
tially the  same  fee  for  their  work.  They  each  had  a  different 
job — a  different  ship  to  build  of  the  same  type,  known  in  the 
contracts  as  the  standard  type  complete  vessel:  cost-profit 
sharing.  Their  fees  compare  as  follows  for  the  first  lot  in 
each  case  of  the  given  tonnage: 

COMPARISON  OF  FEES  FOR  THREE  BIG  FABRICATING  PLANTS  AT 
HOG   ISLAND,    BRISTOL   AND   NEWARK  YARDS^ 

Hog  Island  Bristol  Newark 

Number  of  ships  and  tonnage 50 — 7,500  40 — 9,000  50 — 5,000 

Basic  cost  per  ship $1,050,000  $1,305,408  $750,000 

Normal  fee  per  ship $52,500  $64,000  $37. 500 

Minimum  fee  per  ship $38,500  $50,000  $26,000 

Limit  of  premium  or  damage  per  ship.         $14,000  $14,000  $11,500 

Per  cent  on  normal  cost 5  4  90  5 

Per  cent  fee  of  minimum  cost 3-66  3  85  3-47 

These  earlier  contracts  for  140  vessels  were  all  made  before 
the  middle  of  September,  1917.  All  of  the  companies  had 
options  to  increase  the  number  of  ships  at  the  same  or  reduced 
prices.  At  Hog  Island  130  more  were  contracted  for,  making 
the  full  quota  180;  at  Bristol,  50  more,  making  their  quota 
90;  and  at  Newark  100  more,  making  their  total  150.  Usu- 
ally, a  revised  basic  cost  was  made  the  basis  for  the  fee  for 
the  additional  vessels  taken  beyond  the  original  contract, 
thus  presumably  lowering  the  fee  as  the  builders  became 
more  familiar  with  the  work. 

1  Copies  of  these  three  contracts  are  reprinted  in  Hearings  on  Senate  Resolu- 
tion 170,  Vol.  I,  pp.  260-279;  747-777,  with  other  contracts. 


CHAPTER    XXI 

Extent  of  Subcontracting  in  Fabricated  Ships 

At  the  fabricating  yards  the  principle  inaugurated  was  to 
have  nothing  done  there  which  could  be  done  outside.  That 
division  of  labor  required  the  main  part  of  the  preparation  of 
parts  to  be  arranged  for  elsewhere  than  at  the  yards.  To 
what  extent  this  was  done  is  shown  by  the  statements  of 
Assistant  General  Manager  F.  T.  Bowles  regarding  the  dis- 
tribution of  subcontracts  or  outside  purchases.  This  covers 
the  cost  of  ship  construction  at  Hog  Island  up  to  January  i, 
1 91 9,  giving  the  total  costs  and  the  percentage  of  the  total 
which  had  been  subcontracted  or  bought  from  outside  sources. 
The  items  of  cost  are  also  given,  to  exhibit  the  several  sources 
of  expenditure  in  the  general  plan  of  itemized  costs: 

SUMMARY  OF   COST   AND   SUBCONTRACTS— 180  SHIPSi 

Items  of  Cost                                                        Total  Amount  Percentage 

Subcontracts 

Fabricated  steel $72,592,000  20 

Miscellaneous  steel  fittings 4,850,000  i 

Boilers 19,305,000  5 . 

Turbines 27,568,000  7 . 

Auxiliary  machinery 17,212,000  4. 

General  equipment 39,302,000  10 . 

Stores 10,168,000  2. 


20.2 

•4 

4 

7 

8 

9 

8 


Total $190,997,000  53 .2 

It  thus  appears  that  slightly  more  than  the  half  (53.2  per 
cent)  of  the  entire  cost  of  building  the  fabricated  ships  at 
this  plant  was  expended  in  subcontracts  and  other  outside 
outlays.  It  follows  that  almost  half  of  the  total  cost  was 
taken  up  with  the  assembling  of  the  constitutent  parts  at  the 
fabricating  yards,  the  installation  of  the  machinery,  fixtures 
and  finishing  involved  in  the  completion  of  these  180  ships. 
Roughly  apportioned,  the  inside  cost  of  work  was  virtually 
as  large  as  that  contracted  on  the  outside.     In  fact,  for  the 

1  Hearings  on  Senate  Resolution  170,  Vol.  V,  p.  87,  Exhibit  C  (January  2,  1919). 

219 


220  GOVERNMENT   WAR   CONTRACTS 

fifty  A-ships,  the  first  lot  contracted  for  to  the  American 
International  Corporation,  the  total  cost  of  $41,000,000  had 
only  49.4  per  cent  incurred  on  the  outside,  the  yard  outlay 
exceeding  the  external  expense.  This  was  probably  due  to 
the  fact,  among  other  causes,  that  in  the  building  of  this 
initial  lot  the  contracting  agent  found  the  construction  of 
ways  interfering  somewhat  with  the  assemblage  and  erec- 
tion of  the  ships.  At  any  rate  on  the  next  sixty  A-ships  of 
the  same  type  the  subcontracting  outside  ran  up  to  54.8  per 
cent  of  the  total  cost,  or  over  5  per  cent  higher,  with  the  yard 
costs  correspondingly  lowered.  These  latter  ships  cost 
$54,000,000.  The  only  other  ships  planned  to  be  built  at 
Hog  Island  on  the  contract  in  question  were  the  seventy 
B-ships,  known  as  troop  vessels.  Their  total  estimated  cost 
was  $96,000,000,  of  which  54.2  per  cent  was  contracted  for 
on  the  outside.^     This  contract  was  canceled  in  part  later. 

Subcontracting  on  Plant  Construction 

The  proportion  of  half  and  half  does  not  hold,  however, 
when  one  gets  to  the  part  of  subcontractors  in  the  plant  con- 
struction. Here  the  ways  cost  $65,000,000  or  more,  accord- 
ing as  different  dates  are  given.  Much  more  work  had,  of 
course,  to  be  done  on  the  spot  than  in  vessel  construction. 
The  sixty-seven  subcontractors  who  worked  on  plant  con- 
struction did  work  which  cost  the  Fleet  Corporation 
$12,685,983;  so  that  less  than  20  per  cent  of  this  yard  work 
was  sublet.-  For  that  they  received  a  total  fee  of  $408,344 
and  were  paid  in  rentals  for  equipment,  machinery  and  tools 
used  $176,914,  a  fee  rate  of  3.2  per  cent. 

The  president  of  the  American  International  Shipbuild- 
ing Company,  which  actually  did  the  work  at  Hog  Island  for 
the  agent-contractor,  testified  thus: 

We  made  up  in  consultation  with  the  contractors,  an  estimate  of  the  cost  of  the 
work  that  they  were  going  to  do,  and  also  a  list  of  the  equipment  that  would  be 
required,  and  that  they  would  bring  onto  the  job.  Then  the  contract  was  made 
on  an  agency  basis  with  them,  and  they  were  paid  a  fixed  amount  of  money  as 

^  Hearings  on  Senate  Resolution  170,  Vol.  V  ,  p.  87. 
2  Ibid.,  p.  88,  Exhibit  E. 


WAR    CONTRACT    OPERATIONS  221 

rental  for  the  equipment  and  as  compensation  to  them  for  doing  the  work,  whether 
that  work  as  actually  performed  exceeds  the  estimate  or  comes  under  the  esti- 
mate; they  have  an  incentive  to  get  the  work  done  quickly  and  promptly — and 
speed  was  what  we  were  trying  to  get  all  along  the  line — from  the  fact  that  they 
got  no  more  money  from  the  use  of  their  equipment  for  six  months  than  they 
would  get  for  the  use  of  it  for  two  months.^ 

Much  of  this  yard  work  was  among  the  most  difficult  to 
forecast  in  the  effort  to  estimate  costs,  and  was  consequently 
sublet  on  the  fee  basis.  By  far  the  larger  part  of  the  sublet 
outlay  on  yard  work  was  paid  for  in  fees.  The  actual  amount 
of  fee  subcontracts  was  estimated  at  $7,836,466  out  of  total 
subletting  of  $12,685,983,  or  61.7  per  cent  of  the  work  done 
on  the  fee  compensation.  Practically  half  of  the  total  num- 
ber of  contractors  worked  on  this  basis.  The  other  less  gen- 
eral methods  of  compensation  were,  in  the  order  of  frequency, 
by  rentals,  by  unit  cost  or  by  a  combination  of  these  three 
varieties.-     All  of  these  fees  were  based  on  estimated  cost. 

Agent  Fails  to  Keep  Cost  Records 

Some  mention  should  be  made  of  the  general  principle  of 
subcontracting  practice,  as  it  was  applied  to  yard  building  at 
Hog  Island.  It  is  the  practice  to  subcontract  a  varying  pro- 
portion of  almost  all  large  scale  engineering  work  to  concerns 
which  do  special  work  in  particular  parts  of  the  required 
undertaking.  The  Shipbuilding  Corporation  was  authorized 
and  agreed  to  do  this,  and  subcontracted,  among  other  parts 
of  the  yard  construction,  that  of  pile  driving.  On  this  the 
agent  got  no  fee,  and  the  fee  of  5  per  cent  to  the  subcontractor 
was  the  only  one  paid.^  Any  responsible  agent  would,  how- 
ever, have  regarded  the  interests  of  the  owner  more  scrupu- 
lously than  the  Shipbuilding  Corporation  did  those  of  the 
Fleet  Corporation,  in  the  ordinary  duty  of  keeping  track  of 
costs.  Possibly  because  the  agent  got  no  fee  for  the  outlay 
of  yard  work  it  took  the  unwarranted  position  on  this  matter 

^  Testimony  of  D.  P.  Robinson,  before  Senate  Committee  on  Commerce,  March 
8,  1918.  Hog  Island  Investigation,  Hearings  on  Senate  Resolution  170,  Vol.  II, 
p.  2013. 

2  Testimony  of  Charles  Piez,  Vice  President  and  General  Manager,  Ibid.,  Vol.  V, 
p.  112. 

3  Testimony  of  George  O.  Muhlfeld,  Ihid.,  Vol.  II,  p.  2297. 


222  GO\^RNMENT   WAR    CONTRACTS 

to  which  the  Attorney  General  of  the  United  States  refers  in 
his  report  on  Hog  Island  conditions  as  to  cost  control.  This 
report  says: 

Another  fact  of  strong  significance  is  that  while  the  contract  provided  in  express 
terms  that  the  agent  should  keep  a  detailed  plant  cost  account  and  contained  very 
careful  provisions  defining  cost,  yet  the  agent  at  an  early  date  took  the  position 
that  since  the  government  paid  for  everything  that  went  into  Hog  Island  it  was 
unnecessary  to  comply  with  this  provision.  Hence,  at  no  stage  of  the  work  since 
last  December  could  it  be  determined  what  any  unit  of  plant  construction  cost. 
Thus,  it  was  never  possible  for  the  agent,  and  the  agent  never  attempted  to  super- 
vise either  its  own  work  or  the  work  of  its  subcontractors,  from  the  point  of  view 
of  what  the  work  was  costing.^ 

The  fact  is  that,  especially  as  to  the  yard  construction  at 
Hog  Island,  costs  as  estimated  were  so  soon  distanced  by  the 
excessive  actual  outlay  as  to  make  the  estimates  the  merest 
guesses.  The  original  guess  for  the  yard  construction  cost  of 
$21,191,096,  to  which  sum  the  Fleet  Corporation  limited  the 
cost,  was  later  not  only  doubled  but  trebled  and  more.  But 
part  of  this  was  due  to  changes  in  plans  from  the  original,  for 
which  the  owner  rather  than  the  agent  was  responsible.  Under 
the  circumstances  it  is  not  to  be  wondered  at  that  the  con- 
tractual responsibility  played  at  loose  ends  with  costs  and  con- 
trol of  subcontracting  outlay.  The  attitude  of  the  men  on 
the  job  seemed  to  be  that,  as  the  government  paid  the  bills, 
costs  were  not  a  factor  in  the  effort  to  get  results. 

1  Hearings  on  Senate  Resolution  170,  Vol.  V,  p.  114. 


CHAPTER    XXII 

Profiteering  versus  Patriotism  in  Hog  Island  Project 

The  Hog  Island  project,  in  its  contractual  aspects,  started 
out  with  a  heavy  load  of  prejudice  against  it.  It  gave  to  the 
public,  whether  rightly  or  wrongly,  the  impression  that  it 
was  conceived  in  the  purpose  of  the  profiteer  and  developed 
in  a  riot  of  wastefulness.  The  Denman-Goethals  dispute,  a 
perfectly  natural  issue  between  a  lawyer  and  an  engineer 
accustomed  to  have  complete  control,  helped  to  concentrate 
interest  and  inquiry  almost  exclusively  upon  this  one  of  the 
twelve  fabricating  plants.  There  is  something  heroic  in  the 
fortitude  of  the  responsible  contractors  in  facing  all  the  result- 
ing criticism,  investigation  and  popular  reproach,  biding  the 
time  until  they  could  make  good.  To  a  large  extent,  however, 
the  interests  representing  the  contractor's  side  of  the  bargain 
were  responsible  for  all  that  befell  them.  However  public 
spirited  they  may  have  been  as  individuals,  their  official  atti- 
tude spelled  profiteering  purpose  to  the  public,  which  had 
long  since  made  up  its  mind  that  the  thing  that  the  govern- 
ment paid  for  to  this  contracting  interest  was  not  worth  the 
price. 

Public  Distrust  of  Big  Business  Methods 

In  the  first  place,  the  negotiations  with  the  government 
were  not  open  and  frank.  Mr.  Connick,  of  the  agent  corpora- 
tion, in  his  persistent  failure  to  submit  to  the  Shipping  Board 
the  essential  basis  of  the  contract — the  estimated  cost  of  the 
ships  for  which  he  had  been  negotiating  with  General  Goethals 
— utterly  forfeited  the  confidence  of  the  Shipping  Board  of 
which  the  Emergency  Fleet  Corporation  was  the  subsidiary.^ 
This  vital  datum  of  cost  was  retained  in  the  hands  of  the  con- 
tractors to  be,  without  a  ccrpy  either  in  the  possession  of  the 
Fleet  Corporation's  office  or  of  the  Shipping  Board,  at  the 

^Hearings  on  Senate  Resolution  170,  Vol.  I,  p.  11 13. 

223 


224  GO\^RNMENT   WAR   CONTRACTS 

time  when  the  Hog  Island  contract  first  came  before  the 
board  for  approval.  Indeed  no  amount  of  request  by  wire  or 
by  telephone  succeeded  in  getting  out  of  the  hands  of  the  one 
party  to  the  contract  the  accepted  schedule  of  costs  on  which 
the  fees  were  to  be  calculated.  Under  these  circumstances  it 
is  not  at  all  surprising  that  the  contractors,  with  whom  General 
Goethals  had  negotiated  tentatively  the  Hog  Island  contract, 
failed  to  command  the  confidence  of  the  Shipping  Board. 
As  a  result,  the  shipbuilding  program  lost  practically  two 
months  of  the  most  valuable  time,  in  the  midst  of  the  gloomiest 
outlook  during  our  participation  in  the  war,  in  the  inaugura- 
tion of  its  fabricated  projects  at  the  three  main  yards.  By 
the  resignations  of  the  head  of  the  Fleet  Corporation  and  the 
president  of  the  Shipping  Board,  these  contracts  were  thrown 
forward  into  September  for  final  signature.  By  that  time, 
however,  the  Shipping  Board  and  the  head  of  the  Fleet  Cor- 
poration, Admiral  Capps,  had  taken  time  to  examine  the 
terms,  and  a  much  fairer  contract  had  resulted,  especially  as 
to  terms  of  compensation.^ 

The  view  that  big  business  had  overreached  itself,  not  for 
the  first  time  in  war  contracting,  was  probably  best  voiced  in 
the  attitude  of  the  Shipping  Board's  former  president,  whose 
duty  it  was  to  sign  contracts  representing  the  United  States. 
In  his  testimony  before  the  Senate  Committee  on  Commerce, 
April  5,  1 91 8,  his  position  is  thus  defined  and  emphasized: 

The  question  of  profiteering  at  Hog  Island  was  the  only  one  between  General 
Goethals  and  myself  when  we  handed  in  our  resignations.  I  felt  that,  in  a  great 
transaction  like  this  work,  where  the  government  itself,  and  its  power,  was  the 
main  reliance  for  the  success  of  the  enterprise,  anything  that  looked  like  a  profiteer- 
ing payment  to  the  great  people  on  top  who  could  well  have  given  us  for  nothing 
the  services  of  these  five  or  six  men,  would  be  simply  an  invitation  to  every  labor- 
ing man,  from  the  lowest  unskilled  laborer  up,  to  demand  a  wage  on  a  similar  basis; 
and  that  instead  of  getting  us  more  ships  and  faster  ships,  this  kind  of  overloading 
of  profit  at  the  top  would  impede  the  progress  of  the  work,  by  starting  strikes  and 
labor  disputes  up  and  down  the  scale  of  labor  organization.     .     .     . 

It  is  greatly  to  the  credit  of  the  gentlemen  who  have  succeeded  us  that  a  very 
much  lower  and  fairer  figure  was  fixed  on  for  the  acquisition  of  this  skill  that  these 
men  had  to  give.^ 

1  Hearings  on  Senate  Resolution  170,  Vol.  II,  p.  2021. 

2  Ibid.,  p.  2432. 


war  contract  operations  225 

Navy's  Fair  Price  Policy  a  Bargaining  Factor 

The  real  credit  for  this  reduction  in  contract  fees,  from  one 
of  10  per  cent  of  costs  to  one  of  5  per  cent  or  less,  was  partly 
due  to  the  current  criticism  as  reflected  in  Congress.  There 
was  much  current  discussion  adverse  to  cost-plus  contracts, 
especially  of  the  percentage  type.  But  it  was  also  due  to  the 
infusion  of  the  navy's  fair  price  policy  into  ship  awards,  by 
the  advent  of  Admiral  Capps  as  General  Goethals'  successor 
in  the  Fleet  Corporation.  In  the  negotiations  which  were 
later  resumed,  the  president  of  the  American  International 
Shipbuilding  Corporation,  the  agent,  and  the  operative  com- 
pany at  Hog  Island,  says: 

We  had  this  contract  pretty  well  worked  out  when  the  difficulties  arose  in  the 
Shipping  Board,  and  things  were  laid  aside  until  we  got  into  it  again  with  Admiral 
Capps.  .  .  .  We  told  him  about  where  we  had  reached.  He  gave  us  his 
ideas  about  the  contract;  what  he  thought  the  duties  of  people  in  our  position 
were  to  the  government,  with  which  we  agreed.  We  told  him  that  we  would  like 
to  have  his  ideas  of  what  he  thought  compensation  ought  to  be  here.  He  gave 
them  to  us  and  we  accepted  them,  provided  we  could  work  out  the  proper  form  of 
contract,  which  we  did,  and  I  consider  that  it  was  very  well  worked  out  from  the 
standpoint  of  the  government's  interest.'^ 

The  Hog  Island  contract  was  finally  signed  September  13, 
191 7.  Nothing  was  done  prior  to  that  date,  except  plan  out 
the  designs  and  specifications  provisionally  for  the  yards,  on 
which  later  the  contractors  did  $65,000,000  worth  of  work 
without  getting  any  fee  whatever.  They  sublet  the  fifty 
ways  to  five  different  subcontractors,  in  groups  of  ten  each. 
The  operating  concern,  the  American  International  Shipbuild- 
ing Corporation,  had  the  business  of  subcontracting  largely 
in  its  own  hands,  even  though  the  Fleet  Corporation  main- 
tained an  official  there  whose  more  or  less  formal  approval 
was  necessary  to  make  the  subcontracts  effective.  Not  a 
single  contract  of  this  kind  submitted  to  the  Fleet  Corpora- 
tion's official  for  approval  was  ever  rejected,  although  a  num- 
ber of  them  were  returned  with  objections  stated  and  explana- 
tions asked.     The  practice  was  for  the  shipbuilding  contractor 

1  Hearings  on  Senate  Resolution  170,  \'ol.  H,  p.  2021.  Testimony  of  Dwight 
P.  Robinson. 


226  GOVERNMENT   WAR   CONTRACTS 

to  ask  for  bids  from  subcontractors,  at  least  three  in  each  case, 
thus  preserving  competitive  conditions  in  selection  of  sub- 
contractors.^ These  subcontracting  firms  were  paid  a  fee  of 
5  per  cent  on  the  costs  estimated.  The  task  was  one  of 
enormous  proportions  and  responsibility.  Practically  all  of 
these  contracts  had  to  be  made  by  the  agent  contractor  under 
the  Fleet  Corporation's  nominal  supervision  but  without  any 
close  checking  of  prices  and  terms. 

1  Hearings  on  Senate  Resolution  170,  Vol.  II,  pp.  1572-1573. 


CHAPTER   XXIII 

Policy  and  Practice  in  Wooden  Shipbuilding  Contracts 

From  the  viewpoint  of  the  Shipping  Board,  wooden  ship- 
building was  from  the  very  beginning  of  the  program  regarded 
as  a  desirable  supplementary  source  of  tonnage.  On  that 
matter  there  was  little  if  any  doubt  after  the  United  States 
got  into  the  conflict.  Within  about  three  weeks  after  it  was 
organized  the  board,  finding  that  the  steel  shipbuilding  yards 
were  in  no  condition  to  construct  for  government  account 
anything  but  an  inconsiderable  tonnage  for  some  months  to 
come,  on  existing  facilities  at  their  disposal,  came  to  this 
conclusion  regarding  wood  tonnage : 

Apparently  the  only  available  resource  of  the  country  for  the  further  construc- 
ton  of  tonnage  was  wood,  and  as  many  wooden  ships  driven  by  steam  power 
and  constructed  from  unseasoned  timber  were  in  successful  use  on  the  Pacific 
coast,  it  concluded  to  engage  in  an  enterprise  of  stimulating  the  construction  of 
wooden  cargo  carriers  as  a  supplement  to  the  output  of  the  steel  yards.^ 

The  investigations  on  which  this  decision  was  based  were 
made  by  F.  A.  Eustis  and  F.  Huntington  Clark,  who  went 
thoroughly  into  the  questions  of  the  availability  of  equip- 
ment and  engines  and  its  bearing  on  the  problem  of  similar 
supplies  for  steel  shipping.  The  board's  proposals  were  then 
formulated,  the  wooden  shipbuilders  of  all  coasts  canvassed, 
and  the  conclusions  submitted  to  the  President.  They  were 
in  turn  referred  to  the  Council  of  National  Defense,  from 
both  of  which  in  due  time  official  approval  was  received. 

Some  of  the  earliest  contracts  let  were  for  wooden  ships, 
mainly  of  the  Ferris  type  of  construction.  In  fact,  the  board 
inaugurated  wooden  construction  at  first  more  largely  than 
steel  tonnage,  for  the  reason  already  indicated.  Within  the 
first  22  contracts  awarded  36  ships  were  of  wood,  32  of  both 
wood  and  steel  (composite)  and  28  of  steel,  making  96  in  all, 

^Letter  of  Shipping  Board  to  Senate  Committee  on  Commerce,  May  5,  19 17. 

227 
16 


228  GOVERNMENT  WAR   CONTRACTS 

within  the  first  two  months  of  contracting.  By  the  begin- 
ning of  191 8  over  400  wooden  ships  had  been  awarded,  with 
60  more  pending.  The  standard  was  that  of  3,500  to  4,000 
tons,  Ferris  type,  although  as  many  as  ten  different  types 
figured  in  the  board's  awards  on  any  considerable  scale. 
These  were  mainly  lump  sum  contracts.  The  contract  prices 
for  the  Ferris  type  wooden  steamers  ranged,  during  most  of 
this  period,  from  $140  to  $160  per  deadweight  ton.^  In 
point  of  geographical  distribution  of  contracts  this  branch  of 
the  industry  was  the  most  widely  extended  branch  of  the 
shipbuilding  program.  It  included  a  large  number  of  ports 
on  every  coast,  including  the  Lakes.  Up  to  December  i, 
1918,  contracts  had  been  let  for  1,034  ships  of  3,024,000  tons 
involving  commitments  of  $503,129,582,  including  34  con- 
crete ships. 

Elements  of  Reaction  and  Delay  on  Contracts 

From  this  apparently  normal  policy  toward  wooden  ship- 
building, as  a  part  of  the  means  of  meeting  the  maritime 
emergency,  there  resulted  some  reaction  about  the  time  of 
the  Goethals-Denman  resignations.  These  two  officials  had 
apparently  been  in  entire  accord  on  the  advisability  of  push- 
ing wooden  construction  wherever  it  could  be  done  without 
prejudice  to  the  major  interest  of  reliance  on  steel  tonnage. 
Although  the  wooden  ship  plan  was  generally  attributed  to 
President  Denman,  who  knew  the  capabilities  of  the  Pacific 
coast  on  this  matter,  General  Goethals  had  actually  brought 
to  the  point  of  executed  contracts  or  ready  for  signing  as 
much  as  1,218,000  tons  of  such  ships  prior  to  the  date  of  his 
resignation. 2  Possibly  the  report  of  those  who  made  the 
survey  as  to  the  engine  supply  for  the  wooden  ships,  that 
they  could  furnish  within  the  next  eighteen  months  enough 
engines  for  a  wooden  ship  production  of  between  2,500,000 
and  3,000,000  tons,  awoke  jealousies. ^ 

1  Hearings  on  Senate  Resolution  170,  Vol.  I,  p.  1837. 
^Ibid.,  p.  1 100. 
^Ibid.,  p.  1098. 


WAR   CONTRACT    OPERATIONS  229 

Between  the  end  of  July  and  the  beginning  of  January  fol- 
lowing, adverse  attitudes  on  the  part  of  the  Fleet  Corporation 
toward  wooden  shipbuilding  became  rumored.  Airplane 
spruce  production  on  the  west  coast  asserted  a  prior 
claim  on  the  industry.  The  effect  was  a  suspension  of 
activities  already  under  way  and  of  a  most  promising  char- 
acter for  tonnage  production.  The  report  that  the  Anacortes 
yard  on  the  Puget  Sound  might  be  closed  down,  with  several 
ships  well  advanced  toward  completion,  had  a  damaging 
effect  all  along  the  west  coast.  The  reason  for  the  temporary 
suspension  of  letting  these  contracts,  in  January,  1918,  was 
alleged  to  be  the  difficulty  in  getting  out  the  timber  needed  for 
beginning  construction.  That  applied  to  the  yards  unequally. 
Some  of  the  eastern  yards  had  taken  contracts  without  being 
sure  of  their  supply;  some  southern  yards  found  the  lumber 
contractors  of  that  section  unable  to  get  out  timbers  as  fast 
as  was  anticipated;  and  others  whose  experience  was  nil 
should  never  have  been  awarded  any  ship  contracts  of  any 
kind.  The  time  to  take  account  of  the  situation  had  arrived, 
and  contracting  was  thus  and  then  suspended  after  pending 
negotiations  were  cleared.     But  this  was  only  temporary. 

Policy  of  Conservative  Control  Prevails 

The  lack  of  progress  in  cases  where  contracts  were  actually 
awarded  may  have  led  to  a  suggestion  of  cancelation;  but 
these  were  only  incidental  to  the  fundamental  difficulty  of 
reenlisting  wooden  shipbuilders,  lumbermen  and  others  in 
the  Emergency  Fleet  Corporation's  program  if  it  once  allow^ed 
the  suspension  of  work  where  builders  and  accessory  industries 
had  made  commitments  on  its  promises.  The  Fleet  Corpora- 
tion, having  heard  from  the  commercial  interests  of  the  coun- 
try on  this  subject,  thought  enough  of  the  exigency  to  issue 
a  statement  of  policy  regarding  wooden  shipbuilding.  It 
feared  that  the  concentration  of  the  country's  demands  on 
the  Pacific  coast  for  lumber  might  interfere  with  the  other 
war  contract  industries  depending  on  lumber,  if  more  wooden 
ship  contracts  were  awarded.     Hence  an  embargo  on  ship- 


230  GOVERNMENT   WAR   CONTRACTS 

ments  from  that  area  of  production.  But  it  was  held  that 
this  restrictive  policy  was  based  on  misinformation — infor- 
mation that  was  brought  to  the  Shipping  Board  by  agents 
sent  by  the  board  to  ascertain  the  Pacific  coast  situation 
without  knowing  beforehand  anything  about  the  resources 
and  methods  of  that  territory.  This  sort  of  policy  could  but 
be  demoralizing,  if  not  actually  causing  doubt  as  to  the  sin- 
cerity of  purpose  of  the  board  toward  wooden  ship  construc- 
tion. This  suspicion  was,  however,  largely  dissipated, 
though  much  too  late  in  being  issued,  by  the  following  an- 
nouncement by  the  board  on  January  21,  1918:^ 

The  policy  of  the  Shipping  Board  and  the  Emergency  Fleet  Corporation  is  to 
build  the  ships  that  can  be  built  and  to  build  them  as  fast  as  human  labor  can 
turn  them  out.  This  applies  to  the  wooden  ships  as  well  as  to  the  steel  ships. 
Our  policy  is  to  give  as  much  support  as  possible  to  those  who  already  have  con- 
tracts rather  than  withdraw  that  support  in  order  to  extend  the  number  of  yards 
and  ships  that  might  exist  on  paper.  New  contracts  are  balanced  against  the 
available  labor  supply  and  the  available  supply  of  materials.  .  .  .  The  con- 
tracts already  issued  for  wooden  ships  call  for  more  lumber  than  the  amount  that 
is  being  supplied  at  the  present  time.  As  soon  as  there  is  assurance  of  getting 
more  lumber  it  will  be  safe  to  issue  more  contracts  for  wooden  ships. 

^  Hearings  on  Senate  Resolution  170,  Vol.  I,  p.  1000. 


CHAPTER   XXIV 

Aircraft  Production  Contracts 

No  other  sphere  of  governmental  war  contracting,  not  even 
excepting  shipbuilding,  was  anywhere  so  disappointing  in 
results  within  the  war  period  as  that  of  aircraft  production. 
The  national  weakness  of  boasting  about  bigness  was  here  at 
its  best,  especially  among  some  of  the  official  misleaders  of 
popular  expectation.  When  the  midsummer  program  of 
1 91 7,  promising  25,000  planes,  turned  into  the  apparently 
fruitless  situation  of  the  autumn  of  191 8,  the  country  was 
simply  heartsick  with  dismay.  It  was  a  real  relief  to  get 
Justice  Charles  E.  Hughes's  report  to  the  Attorney  General, 
made  public  October  25,  1918.^  Something  less  than  a  month 
later,  on  November  20, 1918,  following  the  armistice  of  Novem- 
ber 1 1 ,  General  Pershing  made  his  report  on  the  organization 
and  operation  of  the  i\merican  Expeditionary  Forces,  from 
May  26,  191 7,  to  the  signing  of  the  armistice.  In  that  he  said 
of  the  army's  equipment  for  modern  war,  that  among  our 
most  important  deficiencies  in  material  were  artillery,  aviation 
and  tanks.     And  of  aircraft  he  specifically  stated : 

In  aviation  we  were  in  the  same  situation,  and  here  again  the  French  Govern- 
ment came  to  our  aid  until  our  own  aviation  program  should  be  under  way.  We 
obtained  from  the  French  the  necessary  planes  for  training  our  personnel,  and 
they  have  provided  us  with  a  total  of  2,676  pursuit,  observation  and  bombing 
planes.  The  first  airplanes  received  from  home  arrived  in  May,  and  altogether 
we  had  received  1,379.  The  first  American  squadron  completely  equipped  by 
American  production,  including  airplanes,  crossed  the  German  lines  on  August 
7,  1918.2 

It  should  be  said  in  advance  that  the  military  authorities 
never  succeeded  in  developing  the  prewar  air  service  to  any- 
thing like  an  adequate  position.     In  March,  1916,  the  Sec- 

^  Report  of  Charles  E.  Hughes  on  Aircraft  Production  Investigation,  October 
25,  1918,  Congressional  Record,  December  30,  1918,  Appendix  A,  pp.  883-914. 

-  Report  of  General  Pershing  to  the  Secretary  of  War,  November  20,  1918,  Con- 
gressional Record,  December  30,  1918,  Appendix  B,  p.  915. 

231 


232  GOVERNMENT   WAR    CONTRACTS 

retary  of  War  first  took  up  the  question  of  letting  aircraft 
contracts.  One  of  the  first  things  to  vex  his  official  soul 
after  assuming  office  was  a  bitter  feud  out  of  which  charges 
of  insubordination  arose  between  the  Chief  Signal  Officer, 
then  in  command  of  aviation  matters,  and  a  subordinate 
officer  of  greater  talent  and  zeal  than  patience  in  promoting 
the  aviation  section.^  These  sources  of  friction  were  elimi- 
nated by  reorganization.  Under  the  newly  awakened  interest 
in  the  possible  needs  of  the  army,  which  had  almost  neglected 
this  arm  of  service  hitherto,  the  Secretary  got  into  communi- 
cation with  the  three  or  four  leading  manufacturers  of  aircraft 
in  this  country,  only  to  find  that,  with  their  commitments  to 
European  powers  on  lucrative  contract  work,  early  deliveries 
to  the  United  States  could  not  be  expected.  The  official 
attitude  is  thus  illustrated  by  two  incidents.  In  the  aircraft 
section  of  the  Signal  Corps  the  Secretary  found,  as  he  told 
the  Select  Committee  on  War  Expenditures,  "a  very  serious 
condition  of  disorganization. ' '  ^  Army  officers,  in  some  known 
cases  at  least,  had  allowed  petty  jealousies  and  temperamental 
attitudes  toward  one  another  to  overshadow  the  devotion  to 
duties  they  owed  to  the  nation.  The  net  result  was  that  the 
progress  of  this  important  branch  of  service  was  to  some 
extent  sacrificed  to  personal  animosities.  The  other  incident, 
illustrating  the  low  estimate  in  which  aircraft  was  then  held 
even  by  those  in  high  command,  is  shown  in  the  rejection  by 
General  Funston  of  the  offer  by  the  Secretary  of  War  of  air- 
planes for  the  memorable  pursuit  of  the  Mexican  raider,  Villa, 
in  the  American  Army's  incursion  into  that  country  with 
General  Pershing's  cavalry  column  in  April,  1916.  Prior  to 
August  29,  1916,  there  had  apparently  been  no  special  appro- 
priation made  for  developing  aircraft. 

War  Authorities  Isolated  from  Aircraft  Industry 

Not  only  was  there  lack  of  development  within  the  military 
organization.     That  short  sighted   attitude  of  the  military 

^  Testimony  of  the  Secretary  of  War,  Hearings  on  War  [Expenditures,  Ser.  II, 
Vol.  I,  pp.  3-7. 


WAR    CONTRACT    OPERATIONS  233 

establishment,  of  keeping  itself  out  of  touch  with  the  branches 
of  the  country's  industrial  organization  on  which  it  must  rely 
most  directly  in  case  of  an  emergency,  now  demonstrated  its 
folly.  This  part  of  the  contractual  situation  has  been  aptly 
described  in  a  somewhat  critical  summary  of  conditions  after 
the  country  had  been  at  war  a  full  year  and  had  become  awak- 
ened to  a  comprehensive  aircraft  program.  Speaking  of 
governmental  neglect  to  take  interest  in  aircraft  development, 
this  survey  says: 

When  we  entered  this  war  a  year  or  more  ago  our  War  Department  had  a  few 
airplanes  which  proved  themselves  worthless  when  tested  in  Mexico.  We  had  a 
number  of  aircraft  inventors  and  experts.  We  had  men  of  capital  who  believed  in 
the  future  of  the  airplane  both  for  purposes  of  war  and  of  peace.  The  Dayton- 
Wright  Company  was  making  planes  and  other  accessories,  but  was  not  manufac- 
turing motors.  The  Curtiss  interests  were  making  planes  and  engines.  The 
Wright-Martin  Aircraft  Corporation  was  making  the  Hispano-Suiza  motors  for  the 
French  Government.  Other  concerns  were  making  parts  of  the  Rolls-Royce  for  the 
British  Government.  There  were  a  score  or  more  of  companies  hard  at  work  on 
various  types  of  engines  and  completed  planes. 

We  had  laid  a  firm  foundation  of  the  aircraft  industry.  This  industry  thought 
it  had  the  right  to  expect  the  support  and  patronage  of  our  government.  No  such 
support  was  extended  when  Germany  invaded  Belgium  and  plunged  Europe  into 
war  in  1914,  but  our  inventors  and  manufacturers  of  aircraft  devices  renewed 
their  efforts  so  as  to  be  better  prepared  in  the  event  we  were  dragged  into  the 
conflict. 

The  War  Department  prejudiced  the  contractual  situation, 
in  both  policy  and  in  practice,  by  drawing  into  its  council 
men  who  knew  little  or  nothing  of  this  specialized  craft. 
Its  practice  was  that  of  relying  on  men  who  had  not  hitherto 
wrestled  with  the  problems  of  the  industry.  Would  any  other 
nation's  military  authorities  in  such  a  crisis  have  failed  to 
call  to  its  service,  for  instance,  the  leaders  in  this  pioneering 
work  who  gave  to  the  world  the  epoch  making  secret  of  power 
over  the  air? 

This  policy  had  its  logical  effect  in  w^idening  the  gap  between 
the  skilled  and  expert  specialists  on  the  one  hand  and  the  war 
authorities  on  the  other.  It  put  into  the  contracting  work 
men  who  had  hardly  the  standing  of  amateurs  in  the  industry. 
There  was  not  a  single  member  of  the  advisory  or  official 
boards  on  aircraft  production  which  guided  the  government 


234  GOVERXMEXT   WAR   COXTRACTS 

who  could  speak  for  and  to  his  fellow  aircraftsmen  for  the 
purpose  of  bringing  the  resources  of  the  craft  into  harmony 
of  action  on  the  government's  behalf.^     On  the  contrary — 

Not  a  man  closely  familiar  with  the  science  or  practice  of  aviation  or  of  aircraft 
production  was  appointed  to  either  of  these  boards,  and  up  to  the  present  date 
(May  17,  1918)  not  a  man  recognized  as  an  aviation  expert  has  been  called  by  the 
War  Department  to  duty  in  either  of  these  official  bodies  or  given  any  authority 
in  directing  its  policy  and  in  expediting  the  speedy  production  of  aircraft  fit  to 
meet  the  up-to-date  and  highly  efficient  German  air  fleet.^ 

Another  case  of  shutting  its  eyes  to  the  facts  of  airplane 
producing  facilities  is  given  in  the  experience  of  the  Witte- 
mann-Lewis  Aircraft  Company.  Although  not  a  large  con- 
cern, no  one  could  truthfully  deny  that  its  staff  was  well 
versed  in  the  science  and  art  of  designing  and  constructing 
airplanes.  It  had  been  in  the  business  for  twelve  years,  in 
which  time  it  had  made  approximately  300  airplanes  for  many 
of  the  best  known  aviators.  These  had  been  flown  all  over 
the  United  States  and  in  foreign  countries.  They  had  a 
capacity  to  deliver  600  machines  inside  of  twelve  months,  and 
100  machines  monthly  thereafter.  They  w^ere  thus  among 
the  oldest  aircraft  manufacturers  in  the  country,  but  were 
never  allowed,  though  once  promised,  to  have  an  opportunity 
to  participate  in  supplying  these  much  needed  craft.^  Dur- 
ing tw^o  years  of  continuous  and  steadfast  demonstration  of 
their  ability  to  serve  the  aircraft  authorities,  they  met  a 
parallel  proof  of  the  government's  policy  of  promise  with 
nonperformance.  That  insistently  confused  conglomeration 
of  incompetence  and  irresponsibility  embodied  in  the  Coffin- 
Deeds- Potter  aggregation  at  Washington,  in  order  to  save  the 
automobile  industry  and  the  piano  manufacturers  for  airplane 
making,  baffled  the  efforts  of  dozens  of  competent  engineers 
and  manufacturers  of  aircraft  to  assist  the  government.*     To 

1  Investigation  of  the  War  Department,  Part  3,  p.  1603. 

*  See  Thomas  Committee  Report,  Senate  Report,  No.  555,  65th  Cong.,  2d  Sess., 
p.  3. 

2  Hearings  before  Subcommittee  of  Senate  Committee  on  Military  Affairs,  65th 
Cong.,  2d  Sess.,  Vol.  II,  p.  920. 

*  Read  reported  statement  of  Victor  E.  Clarke,  of  Aircraft  Production  Board, 
plant  facilities  division,  Ibid.,  p.  895  (second  paragraph);  also  p.  921  (paragraphs 
2  and  3)  in  letter  of  July  30,  1918,  to  Senator  A.  S.  Thomas;  and  p.  896. 


WAR   CONTRACT   OPERATIONS  235 

quote  the  experience  of  an  aeronautical  engineer  with  the 
unbelievably  bad  conditions  at  Washington : 

It  has  been  shown  by  experience  that  in  the  mess  of  the  aircraft  operation  at 
Washington  it  usually  takes  one  a  few  days  to  find  out  whom  he  is  to  see  regarding 
a  particular  question;  when  he  finally  discovers  his  place  it  takes  a  few  days  more 
to  get  an  interview,  only  to  meet  a  youngster  perhaps  who  has  been  given  the 
responsibility  to  place  large  orders  and  decree  the  fate  of  many  anxious  airplane 
men.  If  an  attempt  is  made  to  reach  the  men  presumed  to  be  atop,  it  is  again 
found  that  they  are  many,  and  if  any  is  reached,  it  may  not  take  long  to  face 
the  "youngster"  again  with  the  same  result. ^ 

Extent  of  Production  to  Date  of  Armistice 

The  two  main  lines  of  contracting  in  aircraft  production 
were  for  planes  and  engines.  The  policy — an  utterly  mis- 
taken one  as  events  proved — of  attempting  to  stake  the  air- 
craft program  on  the  creation  of  an  entirely  new  type  of 
engine  out  of  automobile  experience  for  airplane  propulsion, 
resulted  in  the  main  contracts  for  engines  being  placed  with 
Detroit  and  other  automobile  concerns,  numbering  about  a 
half  dozen  in  all.  This  w^as  setting  aside  a  larger  number  of 
engine  building  companies  expressly  for  aircraft,  of  both 
domestic  and  foreign  patents,  who  had  built  for  our  allies 
before  we  entered  the  war.  The  special  industry  of  demon- 
strated capacity  was  thus  only  allowed  to  contribute  inci- 
dentally in  what  was  their  peculiar  field.  The  capture  by  the 
automobile  industry  of  the  contracts  for  many  thousands  of 
engines,  say  25,000  or  more,  has  generally  been  attributed  to 
the  personnel  of  the  Aircraft  Production  Board  at  Washing- 
ton, in  whose  decision  rested  to  a  controlling  extent  the  ques- 
tion of  types  and  kinds  of  engines  and  planes  that  were  to  be 
adopted  for  the  air  service  of  the  army.  The  results,  up  to 
the  date  of  the  armistice,  of  airplanes  and  engines  produced, 
April  7,  191 7,  to  November  11,  191 8,  were  as  follows  i^ 

^  Letter  of  Mois  H.  Avram  to  New  York  Times,  dated  May  2,  19 18. 

^Senator  Shafroth:  "Unjust  Criticism  of  War  Department,"  Congressional 
Record,  February  21,  19 18,  p.  4183.  Senator  Reed,  of  the  Aircraft  Production 
Inquiry  Subcommittee,  Committee  on  Military  Affairs,  characterized  these  figures 
as  "deliberately  misleading,"  although  given  out  by  the  War  Department  as 
representing  the  situation  as  of  November  11,  1918. 


236  GOVERNMENT   WAR   CONTRACTS 

Number  Shipped 

Types  of  Planes:                                                         Produced  Overseas 

DH4  combat 3.227  1,885 

Handley-Page  combat loi  100 

Elementary  training 5i346  •  •  •  • 

Advanced  training 2,474  .... 

Total 11,148  1,985 

Engines: 

Combat  Liberty 13.574  4.383 

Combat  Hispano  (180) 469  245 

Elementary  training 10,568  .... 

Advanced  training 5.221  200 

Total 29,832  4,828 

In  addition  2,676  combat  planes  were  sent  to  the  Allied  Powers. 

Why  the  "Smashing"  Coffin-Deeds  Program  Failed 

To  the  question,  why  this  "smashing"  program  empowered 
with  a  bilHon  of  dollars  failed,  there  seems  but  one  answer: 
It  fell  into  the  wrong  hands.  The  special  branch  of  the  War 
Department  whose  w^ork  it  was  to  be  alert  in  its  particular 
field  lacked  the  elements  of  leadership  in  the  critical  hour;  and 
in  that  emergency  there  was  injected  an  entirely  extraneous 
policy  based  on  the  theory  of  mass  production  of  an  experi- 
mental motor  to  which  all  else  was  subordinated.  The  whole 
vast  program  was  thus  staked  on  the  one  idea,  which  had  yet 
to  be  proved  workable  in  this  special  field.  That  is  substan- 
tially the  conclusion  of  the  Thomas  committee  of  the  United 
States  Senate  after  its  investigation  for  the  Senate  Committee 
on  Military  Affairs.  ^  This  committee  found  that  there  was 
no  sort  of  hope  for  the  once  announced  fleet  of  25,000  air- 
planes to  be  in  readiness  by  or  before  the  time  when  the  army 
could  be  put  into  Europe.  Three  appropriations  had  been 
made  between  March  12  and  July  24,  191 7,  the  latest  of  $640,- 
000,000,  "a.  substantial  part  of  which  had  been  wasted,  and 
a  further  sum  of  $884,304,758   had   been   found  necessary. ^ 

1  Senate  Report  No.  555,  65th  Cong.,  2d  Sess.,  p.  3. 

^  To  get  the  official  statement  of  the  policy  one  should  read  the  brief  Report  of 
the  Chief  Signal  Officer,  War  Department,  for  the  year  ending  June  30,  1918,  on 
"Aviation,"  pp.  1-7.  Also  the  Report  of  the  Bureau  of  Aircraft  Production, 
John  D.  Ryan,  Director,  May  24  to  June  30,  1918.  The  latter  report  covers  the 
first  period  under  reorganization. 


WAR   CONTRACT    OPERATIONS  237 

These  disappointing  results  were,  in  its  judgment,  due  to  three 
causes : 

I.  That  the  airplane  program  was  largely  placed  in  the  control  of  great  auto- 
mobile and  other  manufacturers,  who  were  ignorant  of  aeronautical  problems. 

II.  These  manufacturers  undertook  the  impossible  task  of  creating  a  motor 
which  could  be  adapted  to  all  classes  of  flying  craft.  It  is  not  too  much  to  say 
that  our  airplane  program  has  been  largely  subordinated  to  the  Liberty  motor. 

III.  We  failed  at  the  beginning  of  the  war  to  adopt  the  common  sense  course 
of  reproducing  the  most  approved  types  of  European  machines  in  as  great  num- 
bers as  possible.  This  should  have  been  carried  on  coincident  with  the  produc- 
tion of  the  Liberty  motor.  This  sound  policy  has  very  recently,  but  after  a  lamen- 
table lapse  of  time,  been  adopted. 

In  these  airplane  contracts  the  government  furnished  liberal 
advances  of  working  capita  while  bearing  all  the  costs  of 
production.  The  Wright-Dayton  Airplane  Company  bor- 
rowed $2,500,000  within  a  period  of  about  seven  months,  and 
the  Fisher  Body  Corporation  of  Detroit,  which  had  orders 
for  the  same  number  of  planes,  received  $2,000,000  as  a  loan 
from  the  War  Credits  Board. ^  Here  as  in  other  cases,  the 
government  paid  all  bills,  assumed  all  risks  and  supplied  most 
of  the  funds  for  the  prosecution  of  its  work.  The  contractor 
gave  his  organization  and  his  officers,  in  some  cases  as  the 
Wright-Dayton  Company,  at  excessively  inflated  salaries, 
over  and  above  what  they  received  commercially  when  the 
government  did  not  pay  the  bills.  In  general,  the  govern- 
ment reimbursed,  in  these  airplane  awards,  the  contractor 
for  all  costs  of  labor,  material,  use  of  plant  and  machinery, 
overhead  expenses  as  apportioned,  depreciation  on  plant  and 
equipment,  a  fixed  profit  on  aggregate  costs  and  a  premium 
for  any  reduction  of  actual  below  the  provisional  bogey  cost 
per  unit  of  product. 

Cost-Plus  Contracts  for  Liberty  Engines 

During  the  summer  of  191 7  orders  for  Liberty  motors  were 
awarded  to  six  different  companies  to  the  extent  of  22,000 
engines.  The  distribution  of  these  among  the  several  auto- 
mobile companies  indicates  how  far  that  industry  had  been 

1  Hughes  Report,  loc.  cit.,  p.  884. 


238 


GOVERNMENT  WAR   CONTRACTS 


chosen  to  manufacture  this  specialized  engine  which  hitherto 
had  been  the  more  or  less  exclusive  work  of  the  aeroplane 
industry.  Deliveries  as  well  as  awards  are  shown  in  the 
table  following,  of  9,689  motors  of  the  US-i2s,  out  of  the 
22,000  contracted  for  in  1917:^ 

AWARDS  AND   MONTHLY  SCHEDULE  OF   DELIVERIES  OF 

LIBERTY   ENGINES 


Months 
1917-1918 

November,  19 17 

December 

January,  1918  .  . 

February 

March 

April 

May 

June 

July 

August 

September 

October 

November 


Lincoln  Packard 
Motor      Motor 


Nordyke       Ford 
&  Marmon  Motor 


Co. 

5 

80 

160 

275 

700 

1,400 

1,900 

1,480 


Car 

50 

200 

500 

800 

1,000 

1,200 

1,200 

1,050 


Co. 


25 
125 
550 
700 
800 
800 


Co 


General 

Motors 

Co. 


Total  orders .... 
Actual  deliveries . .  * 
Deliveries  to  the  army . 
Deliveries  to  the  navy .  . 

''To  October  11,  1918 


6,000 

2,787 


6,000 
3,864 


3,000 
157 


200 

800 
1,000 
1,000 
1,000 
1,000 


5,000 
1,868 


25 
125 
250 
300 
400 
500 
400 


2,000 
1,013 


Total 

55 

280 

685 

1,200 

2,250 

3,500 

4,725 

4,455 

1,250 

1,300 

1,400 

500 

400 

22,000 
9,689 
6,895 
2,794 


The  navy,  which  began  at  once  to  utilize  an  American 
designed  flying  boat  for  its  coast  patrol  service,  with  English 
and  British  engines,  made  marked  progress  by  adapting 
engines  and  planes  to  American  manufacturing  conditions. ^ 
Its  policy  differed  from  that  of  the  army  In  utilizing  foreign 
experience  while  developing  American  engine  types,  rather 
than  hazarding  almost  everything  on  the  ability  to  evolve  a 
single  type  of  motor  as  the  army  automobile-aviation  au- 
thorities attempted  to  do  in  the  Liberty  motor. 

By  far  the  larger  proportion  of  the  motors  for  army  aircraft 
use  were  thus  let  to  the  several  automobile  concerns,  some  of 
which  were  recently  and  expressly  organized  to  make  aero- 
nautical engines  for  the  first  time.  Of  course  the  government 
paid  the  cost  for  the  time  and  waste  incident  to  an  Industry 


^  Hughes  Report,  loc.  cit.  p.  902. 

2  Report  of  Navy  Bureau  of  Construction  and  Repairs,  1918,  pp.  11-14. 


WAR   CONTRACT   OPERATIONS  239 

learning  a  new  branch  of  manufacture.  As  the  cost-plus 
figure  was  based  on  the  bogey  or  provisional  cost,  it  had  to 
be  high  enough  to  bring  into  the  operation  these  novices  in 
making  aeronautical  engines,  even  though  the  aircraft  engine 
building  concerns  remained  idle.  The  first  cost  unit  arrived 
at  was  $6,087,  to  which  the  Secretary  of  War  had  the  approval 
of  two  specialists  in  the  motor  field.  On  that  the  agreed 
profit,  at  15  per  cent  on  cost,  was  to  be  $903.05  per  engine. 
Aeronautical  engine  specialists  were  apparently  not  consulted 
generally.  Another  specialist  of  large  experience,  however, 
arrived  at  a  bogey  cost  of  only  $2,400,  not  counting  overhead, 
but  including  labor  and  materials.  It  appears  that  the  Air- 
craft Board,  in  the  person  of  Col.  E.  A.  Deeds,  was  made 
aware  of  this  marked  difference,  but  no  action  resulting  in  a 
reduction  of  bogey  costs  was  taken  until  December,  after 
most  of  the  Liberty  motor  awards  were  made  and  in  process 
of  manufacture  on  the  higher  basic  figure.  In  December, 
however,  after  the  press  and  Congress  became  awake  to  the 
inordinately  high  figure  the  government  was  paying  the  five 
amateurs  that  had  controlled  these  fat  contracts,  the  basic 
cost  of  the  Liberty  engines  was  reduced  from  $6,087  "to  $5,000, 
the  per  cent  of  profit  on  cost  reduced  to  I2|  per  cent  and  the 
resulting  sum  of  profit  per  engine  to  $625.  The  consideration 
in  view  of  which  the  contract  was  modified  was  that  these 
concerns  were  to  have  special  allowance  for  depreciation  and 
have  advances  of  funds  by  the  government.  The  real  cause 
for  the  revision  was,  more  probably,  the  fear  of  the  govern- 
ment's commandeering  these  shops  as  a  whole  on  the  very 
evident  ground  of  manufacturers'  profiteering. 

Analysis  of  Liberty  Engine  Builders'  Profits 

Let  us  see  how  these  engine  builders  fared  even  on  the 
lower  basis  of  I2|  per  cent  of  the  reduced  bogey.  On  this 
feature  the  Hughes  report  goes  into  considerable  detail  cov- 
ering a  full  year  under  the  cost-plus  contract.  According  to 
his  analysis,  the  Packard  Company,  on  a  delivery  of  3,100 
engines,  or  slightly  more  than  half  of  its  award  of  6,000,  had 


240  GOVERNMENT   WAR  CONTRACTS 

a  profit  of  $1,937,500.  That  was  its  fixed  profit  alone  on 
normal  cost,  counting  nothing  for  the  winnings  from  bringing 
the  actual  under  the  estimated  cost,  in  which  of  course  the 
government  would  also  be  the  gainer.  On  the  entire  order  of 
6,000  engines,  which  it  was  then  (September,  19 18)  figured 
would  be  in  delivery  within  eleven  months  from  the  date  of 
letting  the  contract,  the  Packard  guaranteed  profit  would  be 
$3,750,000.  An  added  profit  is  to  be  reckoned  from  the  25 
per  cent  of  the  cost  differential.  As  the  end  of  the  contract- 
ing period  approached,  it  became  as  good  as  proved  that  these 
engines  would  really  average  a  cost,  not  of  $7,087  as  originally 
contracted  for;  nor  even  at  $5,000,  as  was  agreed  on  in  Decem- 
ber, but  "somewhat  under  $3,200  per  engine."  On  the  low 
actual  cost  the  Packard  people  were  thus  entitled  to  a  further 
profit  of  $2,700,000,  as  Justice  Hughes  figured  it,  making 
with  $3,750,000  a  grand  total  of  $6,450,000  earned  on  the 
6,000  motors.^ 

The  Packard  case  is  more  or  less  typical — typical  of  the 
overestimate  of  the  provisional  cost,  of  the  excessive  differ- 
ential and  of  the  profiteering  proclivities  of  the  Liberty  motor 
group  of  airplane-automobile  contractors.  The  Ford  Motor 
Company,  on  the  same  general  bases,  was  estimated  as  gath- 
ering in  profits  of  $5, 375, 000  on  its  order  of  5,000  engines. 
That  matched  pretty  closely  the  Packard  average  profits  of 
$1,075  3-ri  engine  whose  cost  was  really  little  if  any  over  $3,200. 
The  Lincoln  Motor  Company  checked  up  its  first  600  motors 
made,  out  of  its  order  of  6,000,  finding  that  the  average  cost 
even  at  that  early  date  in  its  delivery,  was  only  $3,583  per 
engine.  Its  actual  average  cost  for  the  full  delivery  was 
probably  not  less  than  $3,000;  but  at  the  higher  basis  of 
$3,200  its  yield  of  profit  would  run  up  to  $6,450,000.  If  we 
add  the  further  profits  of  spare  parts  of  $1,500,000  the  grand 
total  was  $8,000,000.  This  takes  no  account  of  the  40  per 
cent  depreciation  which  the  government  was  generous  enough 
to  allow  the  company  for  the  use  of  its  plant  for  the  term  of 
the  contract,  of  say  a  year  and  a  half.     On  an  actual  invest- 

^  Hughes  Report,  loc.  cit.,  p.  906. 


WAR  CONTRACT  OPERATIONS  24 1 

ment  of  $850,000  this  was  golden  winnings.  To  the  same 
company  the  government  advanced  $10,800,000.^  The  two 
other  companies,  the  Nordyke  &  Marmon  Company  and  the 
General  Motors  Company,  including  the  Buick  and  the  Cadil- 
lac, on  their  orders  of  3,000  and  2,000  engines,  respectively, 
could  have  made  little  if  any  lower  average  profits  per  engine. 

Liberty  Motor  Profits  on  a  $4,000  Fixed-Price  Basis 

It  became  clear  quite  late  in  the  Liberty  motor  production 
that  the  government  was  getting  the  bad  end  of  the  bargain, 
as  compared  with  the  contractors  on  the  cost-plus  basis.  On 
this  account  the  Lincoln  Motor  Company's  contract  was 
revised  the  third  time.  It  began  on  the  high  level  of  $6,087, 
later  relapsed  to  $5,000.  By  the  contract  of  July  31,  191 8, 
after  all  of  its  6,000  engines  were  to  be  delivered  as  of  the 
original  schedule  of  dates,  it  accepted  a  fixed  price  contract  of 
$4,000  an  engine.  It  probably  made  $1,000  per  engine. 
Under  this  substitute  contract  at  $4,000  per  engine  and  the 
corresponding  spare  parts,  it  is  figured  that  the  Lincoln 
Company  would  have  reaped  profits  of  $11,250,000  on  the 
9,000  motors  by  completing  deliveries  by  April  i,  191 9.  The 
Nordyke  &  Marm_on  Company  switched  from  its  3,000-engine 
contract  on  a  cost-plus  basis  to  one  of  5,000  on  a  fixed  price 
basis,  at  $4,000  an  engine.  It  contained  also  wage-and-price- 
adjustment  clauses  in  common  with  those  in  the  Lincoln  and 
Packard  contracts.  On  the  newer  Packard  contract,  an  esti- 
mated profit  of  $15,000,000  was  regarded  as  a  conservative 
estimate. 

What  did  the  government  gain  by  this  belated  shift  to  the 
fixed  price  plan  of  compensation?  It  relieved  itself  of  the 
almost  impossible  task  of  keeping  track  of  costs  by  such 
cost  checking  means  as  it  had  at  command.  It  took  away 
from  the  contractors  the  positive  inducement  of  a  demoraliz- 
ing arrangement  to  shoulder  the  entire  burden  of  efficient  con- 
trol over  costs  on  the  tax  payer.  It  cut  out  the  abnormal 
allowances  for  depreciation  to  the  builders.     It  must  have 

1  Hughes  Report,  loc.  cit.,'p.  907. 


242  GOVERNMENT    WAR    CONTRACTS 

greatly  relieved  the  industrial  plants  in  question  of  divided 
responsibility  for  results.  On  the  pecuniary  aspects  of  the 
change  the  Hughes  report  says: 

Under  the  original  cost-plus  contracts  for  the  Liberty  engines — that  is,  with  a 
bogey  cost  of  $5,000,  a  fixed  profit  of  125  per  cent  thereon,  and  an  additional  profit 
of  25  per  cent  of  the  savings  under  the  bogey  cost — the  total  profit  per  engine 
would  amount  to  $1,075  o"  the  basis  of  an  actual  average  cost  of  $3,200  per  en- 
gine, or  to  $1,125  on  the  basis  of  an  actual  average  cost  of  $3,000  an  engine.  It 
will  thus  be  seen  that  the  change  from  the  cost-plus  contracts  to  the  fixed  price 
contracts  saves  the  government  from  about  $75  to  $125  (or  possibly  a  little  more) 
per  engine  on  the  fixed  profit  allowance,  and  ailso  whatever  expense  may  be  saved 
by  the  reduced  requirements  of  cost  supervision  and  accounting  and  in  connec- 
tion with  material.  Upon  the  new  fixed  price  contracts  the  contractors'  profits 
though  reduced,  still  remain  very  liberal.^ 

^  Hughes  Report,  loc.  cit.,  p.  908. 


CHAPTER   XXV 

Contractual  Maladjustment  in  Aircraft  Relations 

In  general,  it  may  be  said  that  the  terms  of  aircraft  awards, 
as  the  urgency  for  producing  results  increased,  tended  to  take 
the  form  of  cost-plus  contracts.  That  was  so  not  only  in 
prime  contract  work,  but  also  in  the  apportioning  of  specific 
operations  to  subcontractors.  It  was  the  case  in  awards  as 
far  apart  in  their  nature  as  those  for  hundreds  of  millions  of 
feet  of  spruce  lumber  for  propeller  blades  and  wings  were 
from  the  metallic  parts  of  the  airplane  framework.  It  was  in 
the  conditions  of  the  times  that  justification  was  found  for 
the  resort  to  this  kind  of  contract.  But  at  bottom  lay  the 
fact  that  for  a  large  part  of  the  war  contracting  authorities 
the  problem  had  gotten  so  far  out  of  governmental  mastery 
as  to  practically  concede  to  the  contractor  his  own  terms. 
Within  limits  there  was  some  general  price  checking  of  a  too 
general  character  to  be  effective  in  many  lines.  The  "bogey  " 
estimate  of  probable  cost  was  a  sort  of  a  tentative  meeting  of 
minds  in  the  form  of  a  forecast.  But  reliance,  outside  of  the 
navy,  was  mainly  on  the  cost  fixing  agencies  of  the  War 
Industries  Board,  especially  for  munitions  contracts;  and  the 
Federal  Trade  Commission  served  as  a  cost  ascertaining 
agency  for  such  raw^  products  as  cement  for  cantonment  con- 
tracts and  for  copper,  etc.  These  serv^ed  to  put  some  limits 
to  the  tendency  to  inflate  costs  in  the  cost-plus  awards. 
How  this  kind  of  award  worked  in  aircraft  work  is  shown  in 
the  Hughes  report,  as  follows: 

The  justification  for  cost-plus  contracts  was  found  in  the  fact  that  the  under- 
takings were  novel  and  that  the  manufacturers  did  not  have  accurate  data  upon 
which  to  make  a  satisfactory  estimate  of  the  cost  of  production.  This  was  con- 
spicuously true  in  the  case  of  airplanes  of  types  with  which  manufacturers  in  this 
country  had  been  unacquainted  previously.  For  production  in  large  quantities 
either  new  plants  or  greatly  enlarged  facilities  at  existing  plants,  as  well  as  special 
tools,  would  be  required  to  meet  an  exigency  of  uncertain  duration,  and  it  would 
also  be  necessary  to  procure  the  requisite  labor  and  materials  for  the  new  under- 

243 
17 


244  GOVERNMENT   WAR   CONTRACTS 

takings  in  a  rising  market  and  to  provide  working  capital  for  long  periods;  and, 
while  motors  had  been  manufactured  here  upon  a  large  scale,  the  newly  designed 
engines  for  the  service  airplanes  required  such  a  reduced  weight  per  horsepower 
and  such  delicacy  of  construction  that  it  was  felt  that  the  enterprise  had  many 
elements  of  uncertainty.  In  these  circumstances  it  was  not  an  unreasonable  con- 
clusion that  if  contracts  for  the  new  types  of  airplanes  and  for  the  new  engine  were 
offered  solely  on  a  fixed  price  basis,  either  manufacturers  would  not  undertake  the 
work  or  would  insist  upon  high  prices  as  a  safeguard  against  the  chances  of  ulti- 
mate loss.  It  was  deemed  inexpedient  for  the  government  to  undertake  the  manu- 
facture directly,  and  it  was  decided  to  adopt  the  alternative  of  an  assumption  by 
the  government  of  the  cost  of  manufacture  through  contracts  on  a  cost-plus  basis. 
This  practice,  however,  could  not  properly  outlast  the  reasons  which  may  have 
justified  it  at  the  outset.  Contracts  of  this  sort  lead  to  waste,  foster  abuses,  and 
impose  an  almost  intolerable  burden  of  cost  accounting,  in  itself  a  hindrance  to 
rapid  production.  Early  in  this  inquiry  it  was  abundantly  shown  that  it  was 
highly  important  to  establish  reasonable  fixed  prices  whenever  experience  afiforded 
a  fair  basis  for  estimates.^ 

Unfair  Profits  on  Bogey  Cost  Basis 

How  the  contractors  fared  under  these  awards  for  motors 
is  well  known.  On  the  planes  it  was  little  different.  As  a 
rule  the  profits  turned  out  to  be  exorbitant.  The  contractors 
figured  out  the  bogey  or  estimated  cost  so  high  as  to  make 
themselves  safe  within  a  wide  margin  and  thus  provide  for  a 
premium  measured  by  the  agreed  percentage  of  the  difference 
between  the  fictitiously  high  bogey  and  the  actual  cost.  On 
the  DH4's  the  Dayton-Wright  Airplane  Company  was  to 
have  I2|  per  cent  profit,  on  the  bogey  basis  of  $7,000  per 
machine,  or  a  profit  of  $875  per  plane.  Even  under  the  less 
favorable  conditions  of  early  stages  of  production,  these 
planes  cost  only  $4,400.  On  that  actual  cost  basis,  the  con- 
tractor's profit  would  have  been  $550  per  plane,  instead  of 
$875.  If,  in  addition  to  the  agreed  profit  of  12^  per  cent  of 
estimated  cost,  the  contractor  got  25  per  cent  of  the  difference 
between  estimated  and  actual  costs,  his  added  winnings  would 
in  this  instance  be  $650  more,  making  with  the  $875  a  total 
of  $1,525  per  plane  as  net  profit. ^ 

Why  the  unwarranted  practice  of  counting  profits  on  the 
estimated  cost,  before  cost  specialists  had  checked  them  up, 

1  Hughes  Report,  loc.  cit.,  p.  906. 

2  Ibid.,  pp.  888,  906. 


WAR   CONTRACT   OPERATIONS  245 

is  not  clear.  The  case  of  the  Dayton-Wright  Airplane  Com- 
pany's estimate  was  only  formally  less  egregiously  liberal  to 
itself.  This  was  a  new  plant  with  only  $1,000,000  invested 
whose  sole  occupation  was  on  government  planes  for  which  it 
had  orders  for  4,000  DeHaviland  4's  and  400  Standard-J 
planes.  Its  profits  on  these  two  lots,  allowing  for  no  pre- 
miums of  the  smaller  lot,  figure  out  $6,548,000,  not  counting 
profits  on  experimental  work  or  spare  parts.  This  was  for  an 
estimated  period  of  a  year  and  a  half,  from  date  of  award  to 
completion.  There  was,  however,  a  saving  consideration 
which  allowed  the  government  to  revise  these  excessively 
profitable  contracts,  if  the  bogey  cost  proved  to  be  unduly 
high.  On  that  basis  the  government  placed  that  cost  at 
$5,000  instead  of  the  original  $7,000,  making  the  Dayton- 
Wright  Airplane  Company's  profit  about  $775*  per  plane  and 
the  total  of  $3,300,000  on  the  4,000  planes. 

A  Fair  Basic  Price  by  Arbitration 

In  at  least  some  of  the  awards  the  fixed  price  contract  was 
the  original  one.  The  Wright-Martin  Company  in  its  first 
contract  with  the  Signal  Corps  for  500  of  150  h.p.  Hispano- 
Suiza  motors  took  the  order  on  the  fixed  price  basis.  The 
next  500  order  was  originally  on  the  same  basis,  but  later  was 
canceled  and  included  with  a  larger  order  on  the  cost  plus 
fixed  profit  basis.  Out  of  the  combined  orders  for  7,500 
motors  of  this  kind,  for  which  the  Wright-Martin  Aircraft 
Corporation  had  the  American  rights,  only  500  were  made  on 
the  fixed  price  basis. 

One  of  the  features  of  the  price  determining  with  this  com- 
pany was  the  more  rational  way  of  arriving  at  the  bogey  or 
provisional  cost.  This  was  done  by  a  board  of  arbitration 
determining  independently  what  would  be  a  fair  and  just 
estimated  cost.  For  the  first  1,000  motors  it  was  placed  at 
$3,600;  for  the  second  1,000  at  $3,200,  on  account  of  the 
added  experience.  On  the  third  1,000  it  was  reduced  to 
$3,000,  plus  any  added  expense  of  a  then  pending  wage  ad- 
justment on  the  Shipping  Board  level.     These  wage  rates  were 


246  GOVERNMENT   WAR  CONTRACTS 

raised  to  avert  a  strike,  and  were  reflected  in  the  bogey  price 
by  a  price  of  $3,300  for  the  fourth  1,000.  On  the  first  1,000 
of  the  300  horse-power  motors  the  estimated  cost  was  fixed  at 
$5,000. 

Profits  in  this  case  were  much  less  than  in  the  Dayton- 
Detroit  contracts  for  the  Liberty  motors.  At  15  per  cent  of 
the  bogey  price  the  profit  of  $540  resulted.  That  was  on  the 
first  1,000,  compared  with  a  profit  of  $480  on  the  second,  and 
of  $450  on  the  third,  plus  any  additional  that  might  arise 
from  15  per  cent  of  the  wage  cost  increment.  On  the  fourth 
1,000  the  profit  was  I2§  per  cent  of  the  cost. 

Treatment  of  Aircraft  Industry  Contractors 

Treatment  of  contractors  within  the  airplane  industry  was 
a  source  of  miich  dissatisfaction.  Part  of  this  was  due,  no 
doubt,  to  the  fundamental  ignorance  of  the  people  in  aircraft 
control  for  the  government  of  the  details  and  the  conditions 
existing  throughout  this  industry.  It  was  partly  a  failure 
to  appreciate  the  fact  that  much  capital  had  gone  into  fly- 
ing and  mechanical  production  without  any  hope  of  profits, 
but  with  the  desire  to  participate  in  this  pioneering  industry 
in  a  public  spirited  way.  When  the  war  came  there  was  a 
splendid  opportunity  to  turn  this  attitude  to  account  for  the 
aeronautical  service.  Instead  of  doing  so,  it  was  frittered 
away  or  steadily  disregarded. 

Even  among  the  most  important  contracting  concerns 
doing  government  work  the  chaotic  and  contradictory 
methods  of  administration  left  much  to  be  desired.  The  bane 
of  the  whole  system  was  the  tendency  to  change  specifica- 
tions or  cancel  orders.  Several  hundred  changes  were  made  in 
the  DeHavilands  at  the  Dayton-Wright  Company's  plant 
after  beginning  manufacture.  At  the  Curtiss  Aeroplane  & 
Motor  Corporation  an  order  for  500  Capronis,  a  heavy  bomb- 
ing machine,  was  received  September  15,  1917,  for  which  no 
plans  and  specifications  had  arrived  as  late  as  June  3,  191 8. 
In  spite  of  requests  for  blueprints  and  specifications,  none 
were  forthcoming ;  and  so  the  matter  stood  till  the  war  ended 


WAR   CONTRACT   OPERATIONS  247 

It  all.  The  producing  capacity  of  this  immense  place  with 
six  separate  plants  working  was  not  kept  in  full  employment. 
Its  first  order  for  600  machines  on  June  30  was  not  followed 
up  with  another  order  until  September  15.  Delay  in  pro- 
duction, increasing  the  expense  unnecessarily,  was  the  inevi- 
table outcome  of  such  treatment.  Alore  of  the  same  ineffi- 
cient administration  was  evident  in  the  Order  No.  20,401,  for 
700  JN4D  machines  which  was  canceled  after  the  company 
had  begun  work  on  them.  In  fact,  the  contractor  had  fab- 
ricated practically  all  the  parts  ready  to  assemble  them.  In 
place  of  this  order  they  substituted  the  Model  JN4H  for  the 
same  number  of  machines  on  different  specifications.  The 
material  and  parts  for  the  700  JN4D  were  scrapped.  On  this 
the  Curtiss  people  had  worked  from  December  29  to  the  fol- 
lowing April  29 — exactly  four  months  for  worse  than  nothing. 
The  difference  in  the  two  was  that  the  Curtiss  engine  was  to 
give  place  to  the  Hispano-Suiza  engine,  and  although  there 
were  some  changes  necessary  to  fit  the  new  motor  into  the 
plane,  it  required  new  parts  throughout.  On  these  very 
Hispano-Suiza  engines  the  contractors  had  not  received  all 
the  information  necessary  to  proceed  at  the  expiration  of 
three  months  after  getting  the  order^  from  the  government. 
An  order  for  1,200  of  the  JN4H's  at  a  later  date  specified  four 
different  types  or  models  into  w^hich  the  lot  was  divided,  as  to 
which  there  was  the  same  delay  in  getting  from  the  Signal 
Corps  the  needed  information  to  proceed.  Multiplying 
models  was  another  weakness  of  the  aircraft  authorities,  as  if 
some  new  reason  for  delays  had  to  be  devised.  But  these 
were  not  minor  changes.  In  an  order  of  2,000  Bristol  fliers, 
given  January  10,  1918,  there  were  spare  or  extra  parts  in- 
cluded to  the  value  of  $2,746,185,  on  which  the  Curtiss  firm 
was  to  get  12^  per  cent  profit.  March  30  that  spare  part 
order  was  canceled.  On  a  bigger  scale  of  official  blundering 
was  the  cancelation  of  the  order  for  3,000  Spad  machines 
given  September  15,   1917,^  deliverable  between  January  i 

^Aircraft  Production  Hearings,  Senate  Committee  on  Military  Affairs,  Vol.  I, 
pp.  74-86. 


248  GOVERNMENT   WAR  CONTRACTS 

and  July  i ;  that  was  canceled  November  7,  some  of  which 
were  so  far  advanced  as  to  be  deliverable  in  December. 

This  cancelation  of  a  $30,000,000  contract  included  500 
Capronis  and  came  very  near  embarrassing  the  company. 
The  given  reason  was  the  inability  of  the  Signal  Corps  authori- 
ties to  make  the  Liberty  motor  of  the  12-cylinder  type  fit 
into  the  Spad.  The  8-cylinder  Liberty  motor  had  already 
(October  i,  191 7)  been  declared  obsolete.^  The  claim  of 
Howard  Coffin  that  the  Spad  was  obsolete,  made  so  by  a  two- 
seated  Hun  at  Verdun,  was  unwarranted  because  officers 
from  the  front  testified  to  the  contrary  as  to  the  value  of  the 
canceled  type.  With  perfect  justice  the  naval  officer  sta- 
tioned at  the  Curtiss  plant  characterized  the  Aircraft  Divi- 
sion's action  as  "the  crime  of  the  century. "^ 

The  effect  of  the  government's  methods  of  handling  its 
contracts  was  far  from  favorable  to  progress  in  production. ^ 
For  instance,  after  giving  an  order  for  2,000  Bristol  planes  to 
the  Curtiss  people,  on  specified  lines,  the  go-ahead  order,  as 
the  final  release  for  production  is  called,  was  given  first  for 
only  25,  then  for  375,  and  again  for  400,  so  that  the  plant  was 
kept  at  half  capacity  production  by  this  piecemeal  method  of 
ordering.  During  this  time  repeated  additions  and  changes 
were  being  introduced  so  as  to  still  further  handicap  the  pro- 
duction process.  This  policy  of  hampering  all  efforts  at 
speed  and  at  quantity  production  in  one  of  the  country's 
best  and  most  capable  airplane  plants,  due  mainly  to  the 
incapacity  of  the  Washington  authorities  to  grasp  the  pro- 
duction problem,  was  probably  one  of  the  main  causes  of  the 
tragic  failure  in  our  aircraft  program.  Not  until  well  into 
the  summer  of  1918  (May  20),  when  this  official  debacle  under 
the  Coffin-Deeds  regime  of  automobile-airplane  fiasco  came 
to  an  end,  did  the  authorities  ask  the  Curtiss  Company  to 
produce  for  it  a  plane  of  its  own  design.  This  was  probably 
because  of  the  policy  of  forcing  the  Liberty  motor  into  every 
machine  regardlessly. 

^  Aircraft  Production  Hearings,  Vol.  I,  p.  88. 
"^  Ibid.,  p.  91. 
'  Ibid.,  p.  107. 


WAR  CONTRACT   OPERATIONS  249 

From  a  somewhat  different  angle  the  Wright-Martin 
Company's  experience  is  typical.  That  company  manufac- 
tured motors  in  its  eastern  plant,  while  its  plane  production 
was  done  in  its  Los  Angeles  factory.  Its  experience  in  dealing 
with  the  Aircraft  Production  authorities  illustrates  the  diffi- 
culties of  getting  enough  commitments  to  go  ahead  in  quan- 
tity production.  It  never  obtained  any  engineering  or  design 
specification  from  the  Signal  Corps,  but  performed  all  of  its 
own  engineering  functions  and  submitted  them  to  the  govern- 
ment for  approval.  To  the  urgent  proposal  that  the  Aircraft 
Board,  in  the  spring  of  191 7,  give  engine  orders  for  larger 
production  to  occupy  this  plant  with  $2,000,000  invested  in 
engine  building  of  demonstrated  type  and  service,  nothing 
came  except  a  first  order  for  500,  awarded  July  30,  191 7. 
On  July  25  the  general  manager  stated  to  the  Signal  Corps 
office  that  if  it  could  even  then  place  orders  in  sufficient 
quantity  to  make  developments  worth  while,  deliveries  could 
be  guaranteed  by  the  Wright- Martin  Company  of  7,540 
motors,  beginning  with  sixty  engines,  in  August,  191 7,  and 
building  up  to  1,250  a  month  in  the  following  May  with  com- 
pleted deliveries  by  July  30,  191 8.  All  that  was  asked  was  a 
year's  orders  and  freedom  to  go  ahead. 

In  the  plane  production  of  this  company,  the  initial  order 
of  fifty  planes  brought  out  an  element  of  expense  for  which  the 
Aircraft  authorities  were  notorious.  That  was  "the  miser- 
able condition  of  the  drawings  and  specifications  furnished." 
The  Los  Angeles  factory  manager  stated  that  over  4,000 
changes  had  to  be  made  in  the  drawings  at  a  cost  to  the  com- 
pany of  $60,000  over  and  above  the  estimated  cost,  or  more 
than  $1,000  per  plane,  due  to  slipshod  specifications.  In 
April,  1 91 7,  this  plant  had  a  capacity  of  about  two  planes  a 
week. 

How  completely  out  of  line  the  United  States  Army  author- 
ities were  on  the  aircraft  matter  may  be  shown  by  other  facts 
of  an  official  character.  For  instance  the  Chief  Signal 
Officer  of  the  War  Department,  as  late  as  September  28,  1918, 
as  if  apologizing  for  delinquencies,  states  in  his  annual  report 


250  go\:ernment  war  contracts 

that  the  outbreak  of  the  war  found  the  United  States  with  a 
handful  of  flyers  and  very  few  training  machines;  that 
"there  was  practically  no  aviation  Industry  in  this  country"; 
that  the  number  of  professional  men  trained  as  aeronautical 
engineers  and  designers  was  so  small  as  to  be  practically 
negligible,"  and  that  "outside  of  a  few  men  there  was  no  one 
in  the  United  States  with  experience  In  the  design  or  building 
of  even  training  planes."^  This  statement  seems  to  overlook 
the  fact  that  for  the  period  191 5-1 91 7  the  Aero  Club  of 
America,  at  an  expense  of  $500,000  to  $1,000,000  a  year, 
trained  300  civilians  as  aviators  as  a  reserve  who  were  later 
taken  over  by  the  army  and  the  navy  and  comprised  the  first 
300  aviators  sent  to  France.  Henry  Woodhouse,  president 
of  the  Aero  Club  of  America,  mentioned  at  least  a  dozen 
firms  which  manufactured  airplanes  or  parts  thereof  In  this 
country  at  the  outbreak  of  the  war.  Some  of  these  had  been 
in  business  for  at  least  ten  3^ears,  producing  flying  machines 
for  exhibition  purposes.  Certainly  the  government  had  not 
discovered  our  aeronautical  resources.  Whatever  failure  to 
de\^elop  there  was  in  this  line  was  promoted  by  the  fact  that, 
In  its  prewar  dealings  with  the  craft,  "the  army  and  navy 
required  aircraft  manufacturers  to  spend  $100,000  in  drawings 
and  working  out  specifications  to  get  an  order  for  $10,000, 
and  all  the  manufacturers  lost  money  doing  business  with  the 
government.  "2 

Causes  of  x^ircraft  Failure — Contractual 
Maladjustment 

Most  of  what  has  been  proffered  as  explaining  the  break- 
down of  our  aircraft  program  has  been  found  in  general  causes, 
such  as  the  armistice  and  the  delays  In  production.  To  cite 
the  armistice  is  little  short  of  pleading  "the  baby  act."  It 
was  the  business  of  the  strategists  of  the  advisory  Aircraft 
Board  to  take  into  account  the  very  evident  contingency  of 
peace.     This  was  all  the  more  so  in  view  of  the  outreachings 

^  Report  of  the  Chief  Signal  Officer  to  the  Secretary  of  War,  1918,  pp.  3-4. 
2  Aircraft  Production  Hearings,  Vol.  I,  pp.  651-652;  also  pp.  664  ff.  on  "  Impor- 
tant Aspects  of  the  Aeronautic  Situation,"  by  Henry  Woodhouse. 


WAR   CONTRACT   OPERATIONS  25 1 

of  the  Central  Powers  for  some  line  of  escape  from  their 
inevitable  dilemma.  Yet  here  we  have  the  aircraft  con- 
tracting authorities  proceeding  on  a  policy  of  commitment  to 
a  two  years'  program  on  a  strictly  experimental  basis.  In  the 
cocksure  conceit  of  that  policy  not  only  was  the  possibility 
ignored  of  our  earlier  troops  being  inadequately  protected 
on  the  western  front,  as  they  were  for  most  of  the  war,  against 
a  superior  aircraft  force,  ^  but  the  contingency  was  inherent 
of  our  entire  preparation  fizzling  out  into  nothing  more  than 
scrap  iron.  Yet  that  apparently  never  entered  into  the 
vision  which  inspired  the  aircraft  program.  If  it  had,  there 
would  never  have  been  that  abysmally  untoward  blunder  of 
making  so  little  of  the  experience  of  Europe  in  furnishing  our 
armies  with  the  quickest  available  aircraft  equipment,  and 
of  failing  to  utilize  the  aircraft  industry  to  any  but  an 
incidental  extent. 

The  causes  of  aircraft  failure  may  be  classified  as  fun- 
damental and  administrative.  Among  the  first,  one  thing 
stands  out  in  clear  relief  at  the  very  start.  And  that  is  almost 
inextricably  linked  up  with  another  equally  basic  in  its  effect 
on  contract  efficiency  in  getting  results.  If  the  judgment  of 
the  aircraft  industry  and  its  authorized  exponents  stands  for 
anything  it  is  that  our  war  program  came  to  grief  primarily 
because  it  was  in  conception,  design  and  theory,  as  well  as  in 
execution,  based  on  false  and  often  obsolete  lines  of  devel- 
opment. That  fact  assumed,  its  practical  outworkings  must 
end  in  breakdown  of  its  own  weight,  as  it  actually  did. 
Parallel  with  this  unscientific  and  extra-hazardous  policy  ran 
the  other  fundamental  cause  of  failure — the  official  impotence 
to  adhere  to  common  sense  principles  in  selecting  specialists, 
executives  and  advisers  in  the  planning  and  performance  for 
this  most  highly  technical  and  exceedingly  intricate  program. 

^  Comparatively  speaking  our  troops  were  almost  unprotected,  so  far  as  our 
airplane  relief  went,  until  the  last  ninety  days  of  the  war.  The  Chief  of  Air 
Service  in  France,  Maj.  Mason  M.  Patrick,  states:  "On  August  2d  was  the  first 
time  that  any  American-built  plane  crossed  the  front  line,"  when  18  DH4's  went 
over.  Of  the  667  American  planes  sent  to  the  front  up  to  November  il,  all 
DH4's,  only  213  were  in  operation  then.  Only  in  balloon  service,  which  the  Air- 
craft Board  did  not  control,  were  we  in  any  sense  protecting  our  ranks  by  adequate 
observation.     War  Expenditures   Hearings,  Ser.  II,  part  4,  pp.  170-171. 


252  GOVERNMENT   WAR   CONTRACTS 

Among  the  administrative  causes  of  failure  the  most 
patent  to  one  who  reads  the  records  is  the  extremely  low 
measure  of  official  capacity  to  utilize  the  organized  industry 
of  aircraft  production  and  to  marshal  the  related  industries 
and  individual  talent  into  the  public  service.  On  the  con- 
trary, the  whole  sickening  story  is  instinct  with  the  ill-fated 
art  of  estranging  hundreds  of  zealous,  patriotic  and  experi- 
enced aircraftsmen  with  millions  of  money  and  thousands  of 
skilled  workmen  ready  to  enlist  without  quibble  as  to  com- 
pensation. The  alternative  path  chosen  was  to  turn  over 
the  program  to  be  exploited  by  cost-plus  contractors  in  an 
industry  alien  to  aircraftsmanship  in  both  principle  and 
policy. 

Appropriations  and  Commitments  for  Aviation 

Out  of  our  vast  outlay  what  did  we  spend  and  what  has  been 
recovered?  How  far  liquidation  of  the  aircraft  program  has 
gone  since  the  armistice  is  shown  by  a  financial  statement 
submitted  to  the  Subcommittee  of  the  Select  Committee 
appointed  to  investigate  the  War  Expenditures  for  the  House 
of  Representatives.  Gen.  Charles  T.  Monoher,  Director  of 
Air  Service,  gives  the  following  as  of  June  30,  191 9: 

Total  amount  appropriated,  including  Signal  Corps $1,219,566,424 

Obligations  to  June  30,  191 7 35. 436,055 

Obligations  to  June  30,  1918 778,385.655 

Obligations  to  November  11,  1918 1,215,369,031 

Obligations  to  June  30,  1919 1,055,652,147 

Reduction  since  armistice,  230  days 159,716,884 

Per  cent  liquidated  since  armistice 131 

Liquidation  of  personnel  was,  of  course,  much  more  rapid 
than  that  of  materials  and  supplies.  The  Air  Service  had 
20,000  officers  at  its  height  and  about  149,000  enlisted  men. 
Within  less  than  the  next  half  year  or  more,  practically  all  of 
the  enlisted  men  had  been  discharged  and  all  of  the  officers 
except  about  4,000,  including  regulars.  Much  of  the  failure 
to  take  proper  care  of  aircraft  property,  wherever  that  may 
have  occurred,  has  no  doubt  been  due  to  the  mere  inadequacy 
of  men  to  put  ordinary  shelter  over  the  property  in  the 
custody  of  the  service.     This  was  not  the  fault  of  the  army. 


CHAPTER   XXVI 

Essential  Aspects  of  Airplane  Spruce  Contracts 

Contracting  operations  in  supplying  the  airplane  spruce 
lumber,  which  enters  so  largely  into  the  construction  of  pro- 
peller blades,  extended  into  two  or  three  main  areas.  The 
navy  found  its  chief  source  in  New  England  and  northern 
New  York.i  But  by  far  the  major  portion  came  from  the 
principal  habitat  of  this  species  in  the  two  States  of  Washing- 
ton and  Oregon.  That  area  supplied  the  army  program, 
w^hich  comprised  the  major  feature  of  our  aircraft  production. 
Our  Southern  lumber  districts  furnished  some  spruce  at  a 
time  when  a  failure  of  the  Northwestern  supplies  seemed  inevi- 
table for  various  reasons.  Of  that  the  chief  destination  was 
the  British  requirement,  for  which  its  buyers  along  with  other 
foreign  purchasers  w^ere  active  in  American  areas  long  before 
we  entered  the  war.  The  main  source,  for  Allied  as  w^ell  as 
for  domestic  airplane  consumption,  was  our  own  Northwest 
and  British  Columbia.  Besides  spruce,  fir,  though  heavier, 
proved  to  be  an  available  substitute  from  the  same  general 
region  of  supply. 

Conditions  Surrounding  Northwestern  Spruce-Fir 

Contracts 

A  determining  feature  in  the  contracting  situation  was  the 
fact  that  spruce  especially  grows  not  in  a  continuous  stand 
but  in  scattered  clumps  or  patches  among  the  prevailing 
timbers  of  other  species.  Until  the  airplane  industry  created 
a  demand  for  this  kind  of  timber,  it  was  relatively  more  or  less 
neglected.  It  was  at  best  a  by-product  in  the  larger  lumber- 
ing and  logging  operations  of  that  grandly  forested  region  of 
other  varieties.  As  soon,  however,  as  the  aircraft  program  of 
the  Allied  Powers  and  that  of  the  United  States  combined 

^  Annual  Report,  Chief  of  the  Bureau  of  Construction  and  Repairs,  Navy  De- 
partment, 1918,  p. 15. 

253 


254  GOVERNMENT   WAR   CONTRACTS 

began  to  disclose  its  enormous  proportions  early  in  191 7,  the 
field  of  spruce  contracting  became  one  of  the  foremost  consid- 
erations in  the  logging  and  lumbering  industry.  Prior  to  that 
by  only  a  few  months  the  shipbuilding  program  for  the  con- 
struction of  wooden  ships,  under  the  auspices  of  the  Emergency 
Fleet  Corporation  of  the  United  States  Shipping  Board,  had 
centered  national  interest  on  this  same  Northwest  as  the  essen- 
tial source  of  unlimited  quantities  of  shipbuilding  timber.  ^ 
That  called  for  Douglas  fir  in  wooden  shipbuilding.  It  was 
with  this  part  of  the  war  winning  program  that  the  loggers 
and  lumbermen  of  the  Northwest,  indeed  on  the  whole  Pacific 
coast,  were  patriotically  preoccupied,  when  the  demand  for 
Oregon  and  Washington  airplane  spruce  became  of  supreme 
import  in  the  world's  war  policy.  In  due  time,  in  fact,  these 
two  claims  on  the  Northwestern  lumber  industry  came  to  the 
point  of  getting  in  each  other's  way.  So  much  so  was  this 
the  case  that  early  in  January,  191 7,  the  letting  of  further 
wooden  ship  contracts  was  for  the  time  being  suspended, 
especially  on  the  Pacific  coast.  Transportation  priorities  for 
shipbuilding  lumber  and  airplane  spruce  began  to  compete  in 
their  claims  for  cars.^  Again  in  September,  191 8,  the  spokes- 
man of  the  spruce  production  office  of  the  Aircraft  Board  at 
Portland,  Major  Hitchcock,  informed  the  lumbermen,  whether 
so  authorized  or  not,  that  it  was  the  intention  to  discontinue 
the  shipbuilding  program  as  a  means  of  insuring  the  spruce 
lumber  supply  for  airplane  purposes.  This  came  as  a  thunder 
clap  to  the  industry,  already  thoroughly  ill-disposed  toward 
the  official  methods.^ 

A  striking  feature  in  the  contractual  arrangements  for  the 
production  of  spruce  was  found  in  the  organization  of  the 
lumbering  and  logging  industry  of  this  region.  Possibly  the 
two  outstanding  features  were  the  large  scale  owners  and 
operators  and  the  merchant  loggers.     The  latter  unit  of  pro- 

1  Testimony  of  J.  H.  Bloedel,  Hearings  on  Senate  Resolution  170,  Vol.  II,  p. 
2115. 

^  Ibid.,  Vol.  I,  p.  972. 

'Testimony  of  Wm.  C.  Butler,  War  Expenditures  Hearings,  Ser.  II,  Vol.  II, 
p.  1029. 


WAR  CONTRACT   OPERATIONS  255 

duction  consisted  of  hundreds  of  local  small  scale  concerns, 
employing  from  twenty  to  fifty  men  each,  owning  their  own 
equipment  and  carrying  on  their  own  operations  in  getting  out 
logs.  The  two  divisions  of  labor  are  as  distinct  as  the  two 
sides  of  a  shield  and  just  as  essential  for  each  other.  They  are 
almost  as  complemental  in  their  respective  functions  as  the 
two  blades  of  a  pair  of  scissors.  Between  them  and  the  colos- 
sal timber  owning  interests  of  the  Northwest  there  are  numer- 
ous contracting  organizations,  including  those  operating  mills 
on  a  more  or  less  extensive  scale,  with  which  the  logging  agen- 
cies are  a  fundamental  factor  in  handling  lumber  contracts  of 
any  considerable  proportions.  The  customary  contract  for 
getting  out  timber  is  for  delivery  at  railway  siding  or  water- 
side at  definite  terms  for  compensation  by  fixed  price  rates 
and  advances  of  funds;  this  work  is  done  during  other  than 
the  winter  months  in  the  lowlands  especially,  admitting  of 
logging  for  about  eight  months. 

As  soon  as  the  Coffin-Deeds  airplane  program  had  com- 
mitted the  country  to  the  much  exploited  scheme  of  creating 
on  our  own  hook  a  25,000-airplane  fieet,  there  began  to  be 
anxiety  about  lumber  for  propellers.  Appeal  was  made  to 
the  various  lumbermen's  organizations  of  the  Northwest,  and 
a  practically  universal  commitment  obtained  for  wholehearted 
support  of  the  government  in  its  airplane  stuff  requirements. 

When  it  came  to  the  actual  work  of  getting  out  from 
6,000,000^  to  30,000,000-  feet  of  spruce  and  fir  per  month,  the 
crux  of  the  situation  became  apparent.  The  timber  owning 
interests,  recognizing  that  in  100  per  cent  of  standing  timber 
in  a  spruce  tract,  only  15  per  cent  was  spruce,  but  that  the 
other  85  per  cent  might  as  well  be  cut  to  avoid  damaging  the 
rest  of  the  stand,  saw  in  the  demand  for  spruce  on  so  large  a 
scale  a  serious  cause  for  the  depression  of  lumber  prices  of 
other  varieties.  To  get  out  the  spruce  with  the  fir  would 
throw  on  the  market  a  great  many  times  more  lumber  of  other 
kinds.     Douglas  fir  was  at  or  about  this  time  selling  to  ship- 

1  Estimate  of  Col.  Chas.  H.  Sligh,  Hearings  on  War  Expenditures  (Aviation), 
Ser.  II,  Vol.  I,  pp.  580-581. 

2  Testimony  of  Howard  H.  Holland,  ibid.,  Ser.  II,  Vol.  II,  pp.  1968-1969. 


256  GOVERNMENT   WAR   CONTRACTS 

builders  for  from  $35  to  $40  a  thousand,  and  airplane  spruce  at 
$105.  With  general  building  operations  suspended  outside  of 
war  time  needs,  with  shipping  for  export  not  at  all  available, 
and  with  railway  priorities  in  force,  what  possible  market 
could  there  be  for  their  surplus  lumber  which  would  come  now 
as  a  by-product  of  spruce  logging  and  cutting? 

x^lthough  this  attitude  was  not  paraded  in  the  foreground 
of  the  Northwestern  situation,  it  was  none  the  less  there  in  the 
form  of  a  deterring  undercurrent  of  decisive  strength.  In  the 
view  of  some,  it  was  the  most  potent  factor  in  preventing  the 
government's  Spruce  Production  Division  from  achieving  its 
object  without  having  to  resort,  as  it  did  in  stress  of  despera- 
tion, to  the  special  cost-plus  contracts. 

First  Stage  of  Airplane  Spruce  Production 

Airplane  spruce  contracting  falls  into  two  periods  in  the 
government's  dealings  with  the  Pacific  coast  area.  The  first, 
under  ^Nlajor  Charles  R.  Sligh,  involved  organization  of  the 
conditions  in  a  field  where  up  to  the  middle  of  June,  191 7, 
practically  nothing  had  been  attempted.  There  were  two 
ways  of  dealing  with  a  distant  situation  on  the  part  of  our 
war  authorities  at  Washington.  One  was  to  utilize  advisory 
committees  of  the  trades  concerned  at  Washington,  and 
operate  along  lines  approved  by  these  interests.  But  that 
put  the  work  into  the  position  wherein  advisers  occupied  the 
two-faced  relation  of  both  selling  to  and  buying  for  the  govern- 
ment. Later  that  policy  resulted  in  a  wholesale  resignation 
of  volunteer  advisers  who,  while  desirous  of  serving  the  author- 
ities, were  unwilling  to  stand  in  illegal  relations  in  contract 
negotiating.  The  other  plan,  of  deputizing  some  one  to  go 
and  organize  the  field,  was  followed.  The  main  fault  of  this 
plan  was  that  the  government  usually  sent  men  who  knew 
nothing  of  the  situation  at  first  hand.  As  ex-Governor  West 
of  Oregon  put  it,  as  late  as  February  i,  1918,  referring  to  the 
Aircraft  Board  heads:  "While  I  find  them — Colonel  Mont- 
gomery, Colonel  Deeds  and  others — earnestly  endeavoring  to 
get  results,  the  seriousness  of  the  situation  out  there  forces 


WAR   CONTRACT   OPERATIONS  257 

me  to  say  that  the  people  here  don't  know  anything  about  the 
situation  out  there  on  the  coast,  and  thus  the  trouble.  They 
are  trying  to  carry  on  lumbering  operations  from  Washing- 
ton."^ The  agents  sent  out  had  not  that  adequate  measure 
of  authority  that  made  them  free  to  plan  out  a  policy  and  put 
a  program  through  to  get  results.  Consequently,  Major 
Sligh's  work  of  somewhat  more  than  four  months  of  organiz- 
ing contracts  did  little  more  than  develop  the  problem  and 
indicate  its  difficulties.  In  summing  up  the  cause  of  this 
delay  in  the  spruce  and  fir  lumber  supply  for  the  factories, 
Major  Sligh  concludes  thus  in  his  testimony  on  the  subject: 

The  procrastination  and  the  indecision  and  the  vacillation  of  the  Aircraft 
Board  that  has  been  indicated  in  ignoring  the  recommendations  that  I  made, 
and  which  policy  has  been  largely  carried  out  in  other  works,  is  responsible  to  a 
very  large  degree  for  the  condition  in  which  they  find  themselves  today.  If 
I  had  been  authorized  to  have  this  stock  cut  to  dimension  in  June,  if  I  had  been 
authorized  to  buy  the  6,000,000  feet  I  asked  for  in  June,  instead  of  having  to  wait 
until  August;  if  we  had  been  authorized  to  give  protection  to  the  80  per  cent  of 
men  that  wanted  to  work,  you  would  not  be  wondering  today  where  you  were 
going  to  get  your  spruce.^ 

Second  Stage — Big  Firms  Get  Cost-Plus  Contracts 

Such  is  the  testimony  of  the  conditions  that  surrounded  the 
attempt  to  deliver  the  monthly  quotas  of  spruce  and  fir  for 
airplane  needs  out  of  the  Northwestern  woods.  The  lumber 
committee  of  the  Council  of  National  Defense  had  failed  to 
organize  the  contracting  plans,  after  some  months  of  swivel- 
chair  activities  at  Washington,  in  which  the  big  lumbering 
interests  and  their  secretaries  floundered  about.  The  efforts 
of  the  Aircraft  Board  to  install  an  organizing  head  on  the 
spot  were  wrecked  by  withholding  authority  in  critical  junc- 
tures, owing  probably  as  much  to  conflicting  councils  as  to 
ignorance  and  lack  of  confidence  in  their  own  agencies  on  the 
coast.  Under  Major  Sligh,  as  well  as  under  his  successor, 
Major  Leadbetter,  the  compensation  in  contracts  was  that  of 
a  fixed  price.  The  spruce  lumber  was  paid  for  at  $105  per  M. 
and  the  fir  at  $55.     This  plan  of  payment  continued  until 

1  Hearings  on  War  Expenditures  Sen  II,  Vol.  II,  p.  1791. 

2  Investigation  of  the  War  Department,  Part  7,  pp.  23 15-23 16. 


258  GOVERNMENT   WAR   CONTRACTS 

Colonel  Disque  came,  who  succeeded  in  November  to  the  task 
now  become  one  of  the  most  urgent.  At  that  date,  according 
to  Major  Leadbetter's  memorandum  of  November  29,  191 7, 
there  was  a  shortage  of  15,000  laborers  in  the  lumbering  and 
logging  industries  of  these  two  States,  and  the  recruiting 
efforts  of  the  Engineer  Corps  were  competing  for  the  logging 
and  lumbering  labor  still  remaining,  until  the  confidence  of 
the  public  in  the  sincerity  of  the  War  Department  was  being 
impaired  by  such  rivalry. 

To  make  matters  worse,  the  attitude  of  the  lumbering  and 
logging  forces  was  prejudiced  by  the  treatment  accorded 
them.  One  of  the  causes  of  delay  in  the  spruce-fir  production 
was  the  failure  to  enlist  adequately  these  numerous  logging 
men.  Captain  Thomas  A.  Sweeney,  of  Portland,  Oregon,  a 
general  construction  contractor,  familiar  with  the  spruce 
timber  industry  of  the  Northwest,  thus  describes  the  condi- 
tions : 

In  November,  1917,  there  was  an  arrangement  made  by  the  government  to 
pay  from  $120  to  $160  a  thousand  for  rived  spruce.  The  No.  I  spruce  at  $160 
was  supposed  to  be  straight  grained  without  spirals  and  without  pitch  knots  and 
other  specifications  to  make  it  first-class  timber  for  wing-beam  stock.  The  No. 
2  was  priced  at  $120.  They  were  asking  for  farmers  and  small  loggers  to  get  this 
out,  and  the  publicity  department  of  the  spruce  corporation  was  very  anxious  to 
get  the  farmers  to  get  the  spruce  out;  but  when  the  farmers  applied  for  an  inter- 
view with  the  powers  that  were  then,  they  were  unable  to  see  them,  and  were 
unable  to  get  into  touch  with  the  financial  arrangements  that  the  government 
would  be  willing  to  make.  Therefore,  the  letting  out  of  spruce  under  contract 
by  the  thousand  was  a  practical  failure.^ 

Whatever  may  be  said  of  the  wisdom  or  unwisdom  of 
abandoning  the  fixed  price  contract  for  the  cost-plus  contract, 
this  midwinter  effort  involved  a  substantial  reversal  of  policy. 

The  cost-plus  contractors  now  made,  through  the  govern- 
ment's Spruce  Production  ofhce.  Colonel  Disque,  an  offer  to 
the  loggers  to  come  in  under  this  arrangement.  Their  atti- 
tude is  best  expressed  in  their  own  resolutions,  as  follows : 

At  a  meeting  held  in  the  fall  of  1917,  of  the  Lumbermen's  Protective  League,  of 
which  the  undersigned  is  a  member,  the  services  of  themselves,  their  organization, 
and  their  equipment,  were  unanimously  tendered  to  the  United  States  for  the 

'  Hearings  on  War  Expenditures  (Aviation),  Ser.  II,  Vol.  II,  p.  1349. 


WAR    CONTRACT    OPERATIONS  259 

winning  of  the  war  and  in  the  filling  of  its  requirements  on  lumber,  and  more 
particularly  in  its  plans  to  increase  the  production  of  spruce  and  other  airplane 
material. 

We,  the  Loggers'  Information  Association  of  Puget  Sound,  having  a  joint  input 
of  1,000,000,000  feet  per  year,  in  meeting  assembled,  again  tender  to  the  United 
States  Government  direct  our  services,  organizations  and  equipment,  without 
profit,  in  the  logging  and  opening  up  of  the  spruce  tract  of  Clallam  County  on  the 
Olympic  Peninsula. 

We  consider  as  unnecessary  and  detrimental  to  a  large  and  important  industry, 
the  continuation  of  the  operation  of  the  so-called  Siems-Carey  Company,  and  ask 
that  it,  in  the  public  interest,  be  canceled.^ 

The  newer  program,  without  really  intending  to  disrupt 
the  small  scale  operations  in  logging,  centered  in  the  awarding 
of  contracts  with  a  small  number  of  large  logging  outfits. 
These  were  of  such  size  as  to  cover  a  given  district  of  the  sev- 
eral into  which  the  spruce  territory  was  apportioned,  so  that 
there  would  be  no  overlapping.  One  of  these,  easily  the  most 
criticized  in  the  discussion  of  the  government's  contracting 
policy  for  spruce  lumber,  was  the  agreement  dated  as  late  as 
May  12,  1918,  between  the  Siems-Carey-H.  S.  Kerbaugh  Cor- 
poration of  Maine  and  the  director  of  the  Aircraft  Production, 
through  the  Signal  Corps  as  contracting  officer  for  the  army. 

Features  of  the  Siems-Carey-Kerbaugh  Contract 

Among  the  most  notable  spruce  contracts  the  so-called 
Foster  agreement,  the  Warren  contract  and  the  Porter 
Brothers  contract  were  well  known  arrangements  for  spruce 
production  with  the  Production  Division,  But  none  of  these 
reached  the  level  of  importance  of  the  Siems-Carey  contract. 
This  latter  included  not  only  the  production  of  not  less  than 
250,000,000  feet  board  measure,  but  also  the  construction  of 
a  railroad  of  some  fifty-two  miles  in  length  into  the  Pleasant 
Lake  district  of  Washington,  These  two  projects  were  tied 
together  as  mutually  dependent,  so  that  without  the  one  the 
other  could  not  become  effective.  It  was  the  expediency  of 
the  railroad  project  that  aroused  misgiving.  Yet  it  was 
deemed  basic  to  the  possibility  of  the  need  of  getting  from  this 
particular  territory  a  maximum  of  500,000,000  feet  of  spruce 

1  Testimony  of  William  C.  Butler,  before  Subcommittee  No,  i  (Aviation),  War 
Expenditures  Hearings,  Ser.  II,  Vol.  II,  pp.  1028-1030. 

18 


260  GOVERNMENT  WAR   CONTRACTS 

through  the  agency  of  this  particular  logging  outfit.  Up  to 
June  30,  1 91 8,  only  90,000,000  feet  of  airplane  spruce  and  fir 
had  been  shipped.^ 

Such  was  the  scale  of  operations  contemplated  in  this  one 
of  half  a  dozen  similar  districts.  What  would  the  company 
be  able  to  deliver  per  month?  The  agreement  was  signed  in 
May  and  deliveries  were  to  begin  with  December,  1918,  at 
10,000,000  feet.  That  left  the  best  of  the  summer  months  for 
work  on  the  railroad,  where  as  many  as  5,000  soldiers  were 
working  under  army  orders  bossed  by  civilian  overseers  under 
working  conditions  in  some  camps  that  were  anything  but  fair 
and  reasonable.  No  such  a  scale  of  output  had  hitherto  been 
kept  up  during  the  winter  by  any  one  company  of  loggers. 
Yet  the  agreement  called  for  10,000,000  feet  in  January,  rising 
to  15,000,000  in  February,  reaching  18,000,000  in  March, 
19,000,000  in  April  and  21,000,000  feet  in  May.  After  June, 
in  which  the  agreed  delivery  was  to  be  24,000,000  feet,  the 
monthly  total  from  the  Siems-Carey  outfit  was  to  be  regularly 
26,000,000  feet. 

The  price  to  loggers  at  which  the  spruce  flitches  were  to  be 
delivered  on  board  cars  at  given  points  for  inspection  was 
$100  for  No.  I  grade  and  $60  for  No.  2,  to  be  paid  for  ten  days 
after  the  presentation  of  the  contractor's  invoices  with  piece 
tally  manifests,  showing  delivery  free  on  board  cars  at  mill  of 
production  and  certificates  of  inspection  by  authorized  govern- 
ment inspectors  certifying  to  measurements  and  compliance 
with  specifications.  Under  Colonel  Sligh,  who  had  charge  of 
the  Spruce  Production  Division  for  the  first  several  months 
of  its  activity  in  191 7,  the  initial  price  was  $105.  That  was 
criticized  as  unduly  low.  But  it  held,  and  brought  out  much 
spruce  under  adverse  conditions,  when  cantonments,  ship- 
building and  other  demands  made  spruce  lumbering  a  side- 
play.  Later  Colonel  Disque  raised  the  price  to  as  high  as 
$140  to  $160,  presumably  for  special  grades.  This  contract 
was  terminable  by  the  end  of  the  war,  as  the  second  draft  shows 
clearly.     In  this  case  the  percentage  profit  was  to  be  a  mini- 

*  Report  of  the  Bureau  of  Aircraft  Production,  John  D.  Ryan,  Director  (May 
24  to  June  30,  1918),  p.  7- 


WAR   CONTRACT   OPERATIONS  26 1 

mum  of  7  per  cent,  but  might  go  as  high  as  15  per  cent.  The 
profits  beyond  the  maximum  of  15  per  cent  were  to  be  re- 
turned, and  the  adjustment  was  to  be  part  of  the  plan  of 
liquidation  and  settlement  at  the  completion  of  the  contract. 
(Article  XVI I.)  At  the  minimum  rate  of  7  per  cent,  if  the 
value  or  cost  of  production  was  as  estimated,  $23,000,000,  the 
sum  of  the  contractor's  profits  would  have  been  on  comple- 
tion, $1,610,000.  At  the  maximum  percentage  allowed  in 
the  agreement  it  would  have  been  $3,450,000,  making  it,  next 
to  the  Hog  Island  contract  of  the  American  International 
Corporation,  one  of  the  largest  and  no  doubt  most  lucrative 
among  governmental  war  awards,  excepting  only  the  Liberty 
Motor  Engine  contracts. 

This  contract  was  peculiar  in  another  respect ;  it  had  not  the 
usual  section  or  paragraph  or  reference  to  standard  definition 
of  what  should  be  included  in  costs.  On  the  contrary,  a 
special  memorandum  on  definition  of  net  cost  of  production 
(Schedule  A)  was  appended  so  as  to  clarify  the  terms  in  this 
peculiar  field  of  enterprise.  Although  the  provisions  of  this 
cost  memorandum  follow  in  general  the  lines  of  definition  in 
use  in  other  types  of  contracts,  they  were  far  more  specific, 
owing  to  the  different  nature  of  the  industry.  A  comparison 
of  the  Ordnance  Office's  schedule  of  this  kind  would  show  how 
widely  the  details  must  vary,  in  the  case  of  a  spruce  lumber 
contract. 

The  Lake  Pleasant  Railroad  Contract 

This  railroad  of  fifty-two  miles,  into  virgin  spruce  and  other 
timber  territory,  became  the  source  of  volumes  of  criticism, 
recrimination  and  some  serious  aspersion  of  corporate  and 
individual  integrity.  Many  who  knew  the  situation  accused, 
not  without  some  show  of  reason,  the  contracting  interests 
and  the  Milwaukee  Railway  representatives  of  collusive 
influence  in  causing  the  government  to  build  a  line  of  unnec- 
essary length  for  its  spruce  producing  purposes.  It  was  to 
cost  $2,500,000,  without  rolling  stock,  the  War  Credits 
Board  was  to  advance  $50,000  on  account,  the  government 


262  GOVERNMENT   WAR   CONTRACTS 

was  "to  pay  all  sums  which  the  contractor  shall  expend,"  in- 
cluding all  interest  on  funds  borrowed,  all  costs  of  subcon- 
tracting, labor,  materials,  equipment,  engineering  and  every- 
thing else  except  "overhead  chargeable  to  the  contractor's 
New  York  office."  The  government  shall  have  an  engineer 
and  an  accounting  officer  on  hand  to  facilitate  payments  and 
expedite  decisions.  The  contract  might  be  canceled  at  the 
government's  will  and  an  adjusted  settlement  effected.  On 
all  of  the  costs  of  construction  and  so  forth  the  government 
was  to  pay  the  Siems-Carey-H.  S.  Kerbaugh  Corporation  7 
per  cent  profit  as  a  minimum  and  not  over  15  per  cent  as  a 
maximum. 

The  employment  of  soldiers  to  the  extent  of  nearly  18,000 
in  June,  1918,^  for  emergency  work  on  this  road  and  in  the 
camps  brought  up  the  question  of  wages.  The  contracting 
lumbermen  for  logging,  as  well  as  for  camp  construction  and 
road  building,  were  supposed  to  have  paid  the  soldiers  the 
regular  scale  of  civilian  employes,  less  the  usual  rate  of  army 
pay.  Although  the  arrangement  was  not  without  some  fric- 
tion and  proved  in  practice  to  be  far  from  ideal  from  the 
soldier's  point  of  view,  working  under  contractors'  civilian 
bosses,  the  situation  seemed  to  have  gotten  to  that  critical 
stage  at  which  anything  practicable  was  the  best  way  out.^ 
Nevertheless,  under  the  cost-plus  contracting  system  there 
was  ground  for  the  complaint  that  some  of  the  contractors 
exploited  the  soldiery  in  the  most  outrageous  manner.  Their 
junior  officers  were,  as  a  rule,  afraid  to  make  and  press  com- 
plaints; their  senior  officers  were  rarely  heard  from,  if  com- 
plaints ever  crossed  their  desks.  The  American  soldier  toiled 
at  his  post  in  the  spruce  regions  of  the  Northwest  to  win  the 
war,  as  truly  as  the  men  on  the  firing  line.  There  was  no 
doubt  that  in  some  cases  his  services  were  taken  advantage  of 
for  cost-plus  profiteering,  on  the  part  of  contractors  and  sub- 
contractors, in  airplane  spruce  production. 

1  Report  of  the  Bureau  of  Aircraft  Production,  June  30,  1918,  p.  7. 

2  Testimony  of  John  D.  Ryan,  Director,  Bureau  of  Aircraft  Production,  before 
Senate  Subcommittee,  Committee  on  Military  Affairs,  65th  Cong.,  2d  Sess.,  Vol. 
II,  p.  1174. 


CHAPTER   XXVII 

Government  Contracts  for  Housing  War  Workers 

Owing  to  the  rapid  concentration  of  workers  in  the  centers 
of  administration  and  industry  the  housing  problem  was  not 
long  in  becoming  acute  in  its  demands  on  governmental  at- 
tention. At  Washington  the  influx  of  officials,  war  workers 
and  clerical  forces  for  all  the  civil,  military  and  naval  agencies 
focusing  there,  produced  a  result  that  obliged  Congress  to 
act  for  relief.^  Even  more  urgent  was  the  call  for  relief  at 
the  navy  yards,  arsenals,  shipbuilding  districts  and  localities 
where  munitions  were  making  or  materials  being  extracted 
under  emergency  conditions.  In  fact,  so  critical  had  the 
conditions  become  that  it  was  no  longer  a  question  of  how 
workers  should  be  housed,  but  whether  or  not  the  industries 
producing  war  supplies  could  continue  to  command  w^orkers 
at  any  price  under  the  conditions  productive  of  an  inordi- 
nately high  labor  turnover. 

Origin  and  Development  of  the  Housing  Program 

Governmental  methods  of  meeting  a  situation  and  solving 
an  urgent  problem  are  well  illustrated  in  the  steps  by  which 
the  housing  plan  took  shape.  As  early  as  October,  191 7,  the 
Council  of  National  Defense  foresaw  the  need  of  anticipating 
action.  It  showed  its  clear  grasp  of  the  task  by  calling  Otto 
M.  Eidlitz,  a  New  York  builder  of  remarkable  executive 
ability  and  business  balance,  "to  investigate  the  question 
whether  there  was  a  lack  of  industrial  housing  in  the  coun- 
try." A  committee  of  five  of  excellent  selection  was  ap- 
pointed to  make  a  report  to  the  Secretary  of  War.  That  was 
submitted  on  October  31,  Mr.  Eidlitz,  chairman.  Acting 
solely  in  an  advisory  capacity,  under  the  same  authority,  a 

1  Act  to  authorize  the  President  to  provide  housing  for  war  needs,  May  16,  1918 
(Public,  No.  149,  65th  Cong.). 

263 


264  GO\^RNMENT   WAR  CONTRACTS 

second  inquiry  was  begun  November  12,  by  Mr.  Eidlitz,  "to 
see  whether,  under  existing  appropriations  or  existing  laws, 
funds  could  be  found  to  take  care  of  industrial  housing  for 
workers  where  it  was  needed."  Congress  was  beginning  to 
be  critical  of  the  use  of  war  appropriations  and  legal  limits 
were  being  respected  with  more  than  ordinary  caution.  Of 
this  inquiry  by  Mr.  Eidlitz,  he  testified  before  the  House 
Committee  on  Public  Buildings  and  Grounds: 

I  went  through  the  throes  of  that  investigation,  and  got  the  Emergency  Fleet 
Corporation  started  on  their  housing,  and  unearthed  the  navy  situation  as  to  the 
opportunities  which  they  had,  where  torpedo  boats  and  torpedo  boat  destroyers 
were  being  fabricated,  that  they  could  provide  those  facilities.  In  February,  then, 
of  19 1 8,  a  bill  was  introduced  and  eventually  in  May  that  crystallized  into  the 
present  bill.     .     .     . 

1  saw  the  Emergency  Fleet  Corporation — their  legal  department.  The  ques- 
tion was  taken  up  whether  they  had  funds  that  could  be  used  for  doing  this  work, 
and  council  determined  after  a  time  that  they  could,  and  subsequently  to  be  sure 
that  there  should  be  no  misunderstanding  of  it,  they  had  a  special  bill  passed  by 
the  Legislature  authorizing  them  to  do  it.^ 

The  navy  found  authorization  in  the  Emergency  Defi- 
ciency Act  of  October  6,  191 7,  for  the  outlay  of  $50,000. 
But  there  were  a  dozen  or  more  localities  where  work  on  navy 
contracts  was  retarded  badly  for  the  lack  of  housing  near  to 
the  works.  Take  the  case  of  the  Bethlehem  Shipbuilding 
Corporation  at  Sparrows  Point,  Maryland : 

They  had  a  contract  with  the  government  to  produce  a  certain  number  of 
vessels  in  a  certain  time.  They  were  perfectly  able  to  do  that,  because  they  took 
no  more  contracts  than  they  had  the  capacity  to  deliver.  The  situation  we  found 
was  simply  that  one-half  of  an  absolutely  equipped  shipbuilding  plant  was  not 
operated  because  they  could  not  keep  the  labor  in  that  vicinity;  thej'  had  housing 
in  Baltimore,  which  meant  a  run  of  an  hour  and  a  half  or  more  each  day  each  way, 
with  the  result  that,  even  though  a  man  might  like  the  wages  and  might  like  the 
work  and  all  that,  they  could  not  hold  the  men.  They  had  1 1, coo  men  employed 
to  get  400.2 

At  Wilmington,  at  Camden,  at  Chester  and  almost  every 
other  locality  along  the  Delaware  shipbuilding  shore,  the  same 
deterrent  condition  prevailed — the  labor  locally  available 
had  been  absorbed,  the  increase  in  workers  had  to  be  drawn 

^  Hearings  on  Operations  of  the  U.  S.  Housing  Corporation,  65th  Cong.,  2d  Sess., 
part  r,  p.  15. 

2  Hearings  on  Senate  Resolution  170,  Vol.  I,  pp.  810-811;  also  Vol.  II,  p.  1391. 


WAR   CONTRACT   OPERATIONS  265 

from  more  distant  places,  places  too  distant  to  go  to  and 
come  from  as  a  daily  matter.  Hence  men  came,  tried  out  the 
work  and  found  it  impossible  to  stick.  Navy  work  at  New- 
port News  was  similarly  handicapped,  and  much  complaint 
arose,  because  the  destroyers  were  likely  to  be  finished  behind 
schedule.  Their  urgent  need  for  convoying  the  fleets  taking 
troops  and  munitions  to  France  was  constantly  in  mind.  In 
the  city  of  Bridgeport,  where  ammunition  contracts  shared 
with  torpedo-boat  construction  in  producing  the  crowding, 
the  situation  was  possibly  at  its  worst  when  Congress  was 
asked  to  pass  the  measure  which  became  the  act  of  May  i6, 
1 91 8,  for  full  authority  enabling  the  President  to  provide 
housing  for  war  needs. ^  By  executive  order  of  June  i8,  the 
Secretary  of  Labor  was  authorized  to  give  effect  to  the  housing 
provisions  in  this  and  in  several  other  acts.^  The  several 
stages  in  legislative  procedure  were  not,  however,  completed ; 
and  not  until  the  act  of  June  4,  191 8,  was  passed  did  the 
United  States  Housing  Corporation  come  into  legal  being. 
It  was  not  organized  until  July.  On  July  8  Congress  raised 
the  housing  appropriation  to  $100,000,000. 

It  thus  required  from  October  to  July  to  develop  the 
machinery  and  delimit  the  scope  of  the  emergency  housing 
problem.  By  the  first  step  the  Fleet  Corporation  took  up 
its  own  task  and  kept  it  separate. 

Extent  and  Results  of  Shipyard  Housing^ 

Housing  for  shipbuilding  labor,  was  largely  under  the 
Emergency  Fleet  Corporation.  By  the  beginning  of  1918,  or 
nine  months  after  war  began,  the  number  of  workers  in  the 
shipbuilding  industry  had  Increased  from  less  than  45,000  to 
more  than  300,000  skilled  workers.  This  entire  body  was 
practically  under  the  government's  control  and  in  its  employ. 

1  Hearings  on  Senate  Resolution  170,  Vol.  I,  pp.  820-821. 

-  Hearings  on  Senate  Resolution  371,  Part  i,  pp.  17-19. 

^  For  extended  discussions  and  testimony  see  title  of  "Housing  Problem"  in 
Index  to  "Hearings  before  the  Senate  Committee  on  Commerce,"  U.  S.  Shipping 
Board  Emergency  Fleet  Corporation,  Vol.  H,  pp.  2490-2491,  referring  to  the  ship- 
yards. 


266  GOA'^RNMENT   WAR   CONTRACTS 

It  had  the  obligation  of  providing  suitable  living  conditions 
to  get  its  work  done.  Besides  the  300,000  in  shipyards, 
another  250,000  men  were  manufacturing  equipment  and 
shipfitting  machinery  in  various  parts  of  the  country.  Hous- 
ing projects  were  located  at  twenty- four  different  shipbuilding 
centers,  at  which  9,286  individual  houses  were  built,  accom- 
modating 20,362  men;  1,108  apartments  accommodating 
3>355  men;  twenty-four  dormitories  for  1,900  men  and  two 
hotels  with  2,681  men.  Total  accommodations  for  28,358 
men  in  this  industry  were  thus  provided,  making  approxi- 
mately 10  per  cent  of  the  total  shipyard  workers  housed  by 
governmental  outlay.  In  this  body  of  contracting  the  Fleet 
Corporation  made  commitments  to  the  amount  of  $58,635,300 
to  twenty-four  different  yards,  on  thirty- two  different  proj- 
ects up  to  November  14,  1918.^  In  connection  with  these 
operations  fifteen  different  municipalities  furnished  school 
facilities  and  other  advantages  and  eleven  utility  companies 
received  loans  for  making  connections  for  gas  and  electric 
current  to  the  houses  provided.  On  passenger  transportation 
commitments  a  net  outlay  of  $1 1,109,380  was  made  for  carry- 
ing workers  to  and  fro  at  various  places. 

In  the  contracts  between  the  Fleet  Corporation  and  the 
companies  for  housing  projects  for  shipyard  workers  certain 
legal  arrangements  were  standardized.  There  were  three 
parties  involved,  including  the  Fleet  Corporation,  the  ship- 
builder and  the  realty  company  which  acted  as  the  subsidiary 
for  the  shipbuilder  to  hold  the  realty,  to  advance  costs  of 
development,  to  execute  bond  for  all  advances  loaned  at  5 
per  cent  for  ten  years  and  covered  by  mortgage,  and  to 
operate  the  housing  facilities  according  to  the  tripartite  agree- 
ment between  the  shipbuilder,  the  realty  company  and  the 
Emergency  Fleet  Corporation.  In  this  agreement  the  Fleet 
Corporation  controls  the  selection  of  architects,  engineers 
and  contractors;  sales,  renting  and  restrictions  for  six  months 
after  the  end  of  the  war,  and  limits  the  rates  of  dividends. 

*  Second  Annual  Report,  U.  S.  Shipping  Board,  Appendix,  Table  XII  (B),  pp. 

188-189. 


WAR  CONTRACT   OPERATIONS  267 

The  shipbuilder  guarantees  the  realty  company's  obligations, 
and  the  winding  up  of  the  project  is  provided  for,  including  a 
maximum  write-off  of  30  per  cent  in  recognition  of  the  high 
construction  costs;  and  to  encourage  individual  purchasers 
this  same  write-off  is  allowed  to  remain  in  the  release  value 
of  the  lots  on  bond  and  mortgage. 

Here,  as  elsewhere,  the  policy  of  not  putting  the  govern- 
ment into  actual  competition  with  private  business  was  fol- 
lowed. In  order  that  the  Fleet  Corporation  might  not  be 
put  to  the  necessity  of  becoming  landlord,  it  provided  the 
unique  plan  of  lending  to  the  shipbuilder  who  in  turn  becomes 
sponsor  and  guarantees  the  acts  of  the  realty  company.  In 
this  way  the  land  was  secured  without  cost  to  the  govern- 
ment, either  by  purchase  for  the  account  of  the  shipbuilder, 
or  by  a  fund  subscribed  by  the  citizens  of  the  locality  in  need 
of  housing.  Advances  made  by  the  government  to  either  or 
both,  as  well  as  to  local  utility  companies,  were  well  protected 
as  a  rule.  How  large  these  commitments  were  is  evident 
still  further  by  the  fact  that  under  the  authorizing  act  of  May 
16,  1918,  the  Fleet  Corporation's  appropriation  was  for  this 
purpose  raised  to  $75,000,000.  By  October,  191 8,  it  had 
obligated  itself  for  $64,802,845  at  twenty-five  shipyards, 
housing  nearly  30,000  shipyard  workers  and  their  families.^ 

One  of  the  most  pressing  of  these  projects  was  at  Hog 
Island,  where  about  20  per  cent  of  the  total  employes  had  to 
be  housed  by  special  projects.  Of  these  there  were  four 
undertaken,  at  an  outlay  of  $10,031,000.  More  than  half  of 
the  $57,000,000  of  commitments  was  for  housing  contracts  at 
or  near  the  Delaware  River  shipbuilding  localities.  For  the 
Hog  Island  needs,  which  exceeded  in  importance,  953  houses 
w^ere  erected  in  one  locality.  Begun  in  May,  they  had  75 
per  cent  completed  by  December  i,  and  practically  all  occu- 
pied. Another  locality  for  600  houses  more  was  to  have  been 
done  by  February,  1919.  The  combined  cost  of  about  2,000 
houses  averaged  $3,407  per  house. ^     In  addition,  the  corpora- 

1  Second  Annual  Report,  U.  S.  Shipping  Board,  1918,  pp.  143-146. 


268  GOVERNMENT   WAR   CONTRACTS 

tion  bought  436  houses  in  process  of  construction  In  Phila- 
delphia at  a  cost  of  $855,405,  averaging  less  than  $2,000  a 
house.  These  436  houses  were  requisitioned,  to  Avhich  the 
corporation  took  title,  excepting  260  of  them  which  by  Febru- 
ary 14,  1919,  it  had  sold  for  cash,  at  a  very  slight  loss.  Others 
were  sold  shortly  thereafter.  On  the  operation  of  renting  the 
net  of  6  per  cent  was  obtained,  the  selling  prices  fell  8  per  cent 
under  cost  for  houses  sold,  and  on  the  entire  Hog  Island  hous- 
ing projects  costing  $6,800,000  an  estimated  loss  of  10  per 
cent  was  allowed  on  the  1,990  workmen's  houses. 

Contractors'   Fees  in  Housing  Corporation  Projects 

Public  criticism  of  cost-plus  percentage  contracts  had  been 
to  a  great  extent  spent  when  the  Housing  Corporation  came 
to  take  up  its  work.  The  method  of  paying  a  percentage  on 
cost  was  forbidden  by  the  Urgency  Deficiency  Act  of  June  4, 
1918.^  Its  legal  authorities,  in  drafting  the  form  of  contract, 
had  the  advantage  of  past  mistakes.  They  therefore  planned 
much  more  deliberately  and  intelligently  for  the  protection 
of  the  government.  Not  only  in  their  formal  draft  of  the 
terms,  but  also  in  figuring  out  the  estimated  or  bogey  cost, 
was  there  a  keener  insight  Into  the  problems  of  fair  bargaining. 
This  was  primarily  due  to  the  fact  that  one  of  the  most  capable 
and  yet  public  spirited  contractors  in  the  building  industry 
was  placed  at  the  head  of  the  Housing  Corporation.  His 
organization  and  prosecution  of  the  work  showed  in  nothing 
to  more  advantage  than  in  the  type  and  forms  of  contract 
utilized  in  this  particular  division  of  war  time  service. 

A  single  quotation  from  the  Senate  Investigation  into  the 
Operations  of  the  United  States  Housing  Corporation  will 
sufihce  to  indicate  this  feature.  That  inquiry  began  shortly 
after  the  armistice,  on  the  question  of  what  the  policy  of  this 
corporation  was  as  to  the  completion,  cancelation  or  abandon- 
ment of  contracts  pending.  Many  of  those  in  process  of  con- 
struction were  for  emergency  purposes  strictly  and  had  no 
permanent  purpose.     Some  at  Washington,  in  semi-comple- 

'  Public,  No.  164,  65th  Cong.,  "Housing  for  War  Needs,"  Sec.  7  as  amended. 


WAR  CONTRACT   OPERATIONS  269 

tion  or  more,  for  dormitory  purposes  for  war  workers  were 
regarded  by  the  corporation  as  too  far  along  to  be  abandoned, 
especially  in  the  congested  and  profiteering  conditions  of 
tenancy  in  the  Capital.  The  estimated  cost  was  $1,834,500 
in  the  award  to  the  G.  A.  Fuller  Company. 

In  answer  to  the  inquiry  as  to  the  character  of  this  con- 
tract, the  president  of  the  Housing  Corporation  explained  the 
method  of  the  sliding  scale  fixed  fee  contract:^ 

The  character  of  their  contract  is  this:  They  state  what  in  their  opinion  is  the 
value  of  the  work.  Our  own  estimating  department  has  made  the  estimate  on 
that  job.  I  fix  the  fee,  the  maximum  fee  that  that  job  carries;  and  if  there  is  any 
addition  in  connection  with  that  proposition  without  there  being  a  definite  change, 
simply  an  overrun  through  excessive  labor  costs  or  material  cost,  or  what  not,  the 
fee  does  not  vary. 

Senator  Hardwick:  What  do  you  mean  by  the  fee? — the  profit  that  they 
got  out  of  it? 

Mr.  Eidlitz:     The  profit  that  they  get ;  their  fixed  fee.     Their  fee  is  fixed. 

Senator  Hardwick:  How  did  you  fix  that  profit?  What  system,  I  mean, 
did  you  adopt? 

Mr.  Eidlitz:  We  have  a  sliding  scale.  It  might  be  interesting  for  you  to 
know  this:  On  all  of  these  jobs  that  we  have  placed,  the  fee  for  jobs  over  one 
million  dollars  is  2|  per  cent.  The  fee  for  all  the  jobs  less  than  $1,000,000  averages 
3I  per  cent. 

Senator  Hardwick:     That  is  on  the  gross  amount  spent — the  gross  cost? 

Mr.  Eidlitz:     On  the  gross  cost;  yes. 

Senator  Hardwick:  Does  not  that  have  a  tendency,  though,  to  make  your 
contractor  swell  the  cost  of  the  construction  considerable? 

Mr.  Eidlitz:     No;  because  we  fix  the  fee. 

Senator  Hardwick:     I  know,  but  you  fix  it  at  a  certain  percentage. 

Mr.  Eidlitz:  We  fix  the  fee  on  what  we  estimate  the  job  is  worth.  I  will 
give  you  a  striking  example  in  connection  with  that.  We  estimated  the  cost  of 
those  dormitories  down  in  the  navy  yard  at  $244,000.  The  contractor  estimated 
it  at  $210,000  or  $200,000.  We  put  it  in  at  that  price.  We  had  fixed  the  fee. 
The  fee  remained  the  same — based  on  what  we  thought  the  job  would  cost.  Now 
the  job  actually  will  cost  about  $250,000.     His  fee  does  not  change. 

One  of  the  pitfalls  of  contracting  experience  in  government 
jobs  was  found  in  the  charges  for  plant  rental.-  Unless  this 
feature  of  expense  were  guarded  the  contractor  might  swell 
rental  charges  for  his  facilities  to  an  extent  which  would 
materially  raise  his  profits.     In  order  to  head  off  this  practice 

1  Hearings  on  Senate  Resolution  371,  Part  i,  p.  35. 
^Ibid.,  Part  i,  pp.  82-83. 


270  GOVERNMENT   WAR   CONTRACTS 

the  Housing  Corporation  contract  proposal  required  a  specific 
statement  from  each  bidder  as  to  what  plant  he  would  supply 
and  at  what  rate  of  rental.  The  contractor's  statement  was 
then  checked  up  by  a  plant  specialist  in  the  corporation  office 
and  it  became  part  of  the  specifications.  The  fee  was  fixed 
for  the  job  in  the  statement  sent  to  the  contracting  bidders.^ 
Of  these,  a  selected  list  of  six  or  eight  had  been  picked  out  as 
representing  the  most  experienced  in  the  field,  so  as  to  get 
competitive  bidding  on  the  fixed  fee  compensation  for  the  job. 
It  was  also  arranged  that  if  the  cost  ran  up  in  excess  of  the 
estimate,  it  resulted  in  a  deduction  in  fee,  and  if  it  ran  below 
it  added  to  his  amount  of  fee  as  a  sort  of  a  penalty-premium 
system  of  compensation. 

Method  of  Selecting  Contractors 

Although  the  Housing  Corporation  was  operating,  in  its 
contract  work,  under  emergency  conditions,  admitting  of  its 
awarding  contracts  without  competitive  bidding,  it  none  the 
less  did  make  it  a  matter  of  established  policy  to  maintain 
competitive  conditions  in  the  selection  of  contractors. ^ 

This  method  may  be  called  the  method  of  selective  compe- 
tition, because  the  actual  rivalry  was  limited  to  a  winnowed 
list  of  bidders.  The  procedure  is  well  worth  describing, 
because  of  its  substantial  soundness  under  the  conditions.  It 
is  true  that  this  method  exposed  it  to  the  charge  of  favoring 
some  at  the  expense  of  other  bidders,  or  of  would-be  bidders; 
yet  it  was  on  the  whole  one  of  the  best  planned  and  most  sen- 
sibly executed  of  the  war  time  contracting.  As  soon  as  it 
became  known  that  the  corporation  or  its  predecessor,  the 
Bureau  of  Industrial  Housing  and  Transportation  of  the 
Department  of  Labor,  was  in  the  field  for  contract  work,  large 
numbers  of  contracting  firms  applied  and  were  listed ;  a  ques- 
tionnaire was  filled  out  by  each  applicant;  in  many  cases  his 
record  was  looked  into  by  an  investigator  as  to  his  efficiency, 

^  Hearings  on  Senate  Resolution  371,  Part  i,  pp.  36,  82-83. 
'^  Ibid.,  Part  i,  pp.  37,  71-72,  90-91.     See  also  Part  2,  pp.  205-206,  for  legal 
opinion  on  this  question  of  selective  bidding. 


WAR   CONTRACT   OPERATIONS  27 1 

his  equipment,  his  capability  for  executing  a  job  of  the  kind, 
the  location  of  equipment  and  his  organization  with  special 
regard  to  the  location  of  the  job.  It  was  the  practice  in  these 
awards  to  select  bidders  so  that  those  of  a  given  locality  in 
which  the  work  was  located  might  have  ample  opportunity 
to  compete  for  the  contract,  provided  they  measured  up  to 
the  standard  of  ability  and  of  competency.  In  spite  of  this 
much  complaint  came  to  the  members  of  Congress,  alleging 
that  some  of  the  stronger  and  more  capable  companies  were 
getting  an  "undue  share  of  the  work."  Owing  to  this  the 
Housing  Corporation  followed  the  practice  of  spreading  the 
contracts  generally  throughout  the  country. 

After  having  selected  a  group  of  half  a  dozen  or  more  of  the 
applicants  for  opportunity  to  bid  on  a  given  project,  invita- 
tions were  sent  to  each  one,  describing  the  project,  as  based  on 
specifications  and  drawings  expressly  designated  by  pages, 
numbers  and  other  forms  of  reference.  In  this  same  invita- 
tion the  essential  requirements  of  the  work  were  described, 
indicating  what  the  contractor  was  expected  to  do  to  meet 
the  government's  conditions.  On  the  Plaza  housing  project 
only  four  of  the  eight  invited  to  bid  actually  replied  with 
bids.  The  others  fell  out  for  various  reasons,  such  as  the 
job  being  too  big  for  their  organization,  because  the  time 
limit  did  not  synchronize  with  other  projects  still  uncompleted 
or  other  reasons.  Out  of  the  four  competitors  the  successful 
one  was  selected  on  the  basis  of  his  answers  to  the  following 
questions  in  the  invitation: 

1.  Your  estimate  of  the  total  cost  of  the  work,  including  your  fee,  overhead 
and  all  operating  expenses,  including  $500  for  office  furniture  and  equipment  for 
corporation's  staff,  electrical  work  and  cost  of  preparing  required  estimates  of  cost 
to  be  submitted  before  award  is  made. 

2.  Detailed  list  of  plant  equipment  required  for  proper  handling  of  this  work, 
to  be  furnished  by  contractor. 

3.  State  the  lump  sum  price  you  will  ask  as  rental  for  said  plant  equipment  for 
the  duration  of  the  work. 

4.  State  the  maximum  rental  price  per  diem,  for  teams  of  horses  and  wagons, 
for  motor  trucks,  not  including  drivers  or  chauffeurs,  specifying  size,  capacity,  how 
equipped  and  number  proposed  to  be  used. 

5.  What  service  will  you,  as  contractor,  render  which  you  consider  to  be  ade- 
quate for  the  proper,  efficient  and  speedy  execution  of  the  work? 


272  GO\^RNMENT   WAR   CONTRACTS 

6.  State  in  detail  the  size  and  personnel  of  the  field  executive  force  you  propose 
to  employ  and  the  salaries  to  be  paid  to  each  member. 

7.  Give  the  name  of  the  member  of  your  organization  you  propose  to  place  in 
charge  of  the  field  work  as  resident  manager  and  the  position  he  now  holds  in  your 
permanent  organization. 

8.  Give  outline  of  your  experience  and  your  ability  to  organize  a  construction 
force  of  the  kind  required  for  the  work  contemplated  herein,  together  with  any 
other  facts  that  you  may  consider  material. 

9.  State  what  branch  of  the  work  you  propose  to  do  with  your  own  forces  and 
what  through  subcontractors. 

ID.  State  the  time  which,  according  to  your  judgment,  would  be  required  to 
complete  the  work  with  the  equipment  and  organization  above  described  to  be 
furnished  by  you. 

II.  State  the  fee  asked  by  you  for  the  full  performance  of  service  as  general 
contractor  not  to  exceed  a  maximum  of  $60,000.^ 

Subcontracting  was  an  important  element  in  any  large 
contract.  Government  officers  had  to  take  account  of  this, 
lest  by  selection  of  untrustworthy,  incompetent  or  fictitious 
subcontractors  the  job  might  get  into  all  kinds  of  entangle- 
ments and  its  speedy  completion  be  defeated.  On  the  other 
hand,  the  prime  contractor  might  undertake  work  for  which 
his  own  organization  was  admittedly  not  fitted,  in  the  hope  of 
econoniizing  in  subletting  fees  or  other  costs.  To  get  around 
that  disposition  on  the  prime  contractor's  part,  the  Housing 
Bureau,  as  a  general  policy,  expressed  the  preference  for  sub- 
letting such  work  as  was  usually  done  by  subcontractors  un- 
less the  contractor  "has  had  for  three  years  a  department  that 
has  done  that  particular  trade  in  his  organization."  The 
object  of  this  was,  among  other  reasons,  to  distribute  the  work 
locally  as  much  as  was  practicable,  so  as  to  avoid  bringing 
into  the  locality  from  elsewhere  labor  and  equipment  that 
could  be  had  locally  on  reasonable  terms.  The  effect  was  to 
distribute  the  public  disbursements  more  generally  within  the 
locality  in  which  the  work  was  being  done.  In  times  of 
labor  scarcity,  of  difficulty  in  transporting  materials  and 
equipment  and  of  limited  employment  of  industrial  capacity 
of_the  locality,  this  was  a  wise  precaution  for  industrial  as 
well  as  for  political  reasons. 

1  This  award  was  made  to  the  lowest  bidder  at  the  fixed  fee  of  $58,000.  See 
Hearings  on  Senate  Resolution  371,  p.  78.  See  form  of  proposal  to  contractors 
bidding,  pp.  82-83. 


WAR  CONTRACT   OPERATIONS  273 

Materials,  Prices  and  Wages  in  Housing  Contracts^ 

The  contractor  in  the  housing  contracts  was  thus  invited 
to  bring  his  organization,  if  he  got  the  award,  and  install  his 
resident  manager  at  his  own  expense,  while  all  other  expenses 
of  the  project  would  be  paid  for  by  the  government.  He  paid 
the  bills  and  was  reimbursed.  But  what  kind  of  check  was 
imposed  on  his  purchase  of  materials,  labor  and  equipment, 
including  salaries  of  others  than  the  general  manager? 

The  Housing  authorities  were  well  fortified  against  abuses 
in  the  purchase  of  materials.  They  utilized  the  Construction 
Division  of  the  army,  which  in  due  time  became  one  of  the 
most  extensive  and  the  most  capable  of  agencies  in  the  vast 
operations  of  governmental  building.  It  was  this  branch  of 
service  that  organized  the  construction  of  the  camps  and 
cantonments,  by  the  cooperation  of  the  Committee  on  Emer- 
gency Construction  and  Contracts.  It  was  originally  a  sub- 
committee of  the  Munitions  Board,  which  later  became  the 
War  Industries  Board.  This  Construction  Division  took  the 
Housing  Bureau's  lists  of  materials  needed,  conferred  with  the 
War  Industries  Board  as  to  the  allocation  of  the  contracts  for 
these  materials  so  as  not  to  interfere  with  existing  emergency 
commitments,  and  on  that  basis  of  allocation  proceeded  to 
purchase  the  materials  for  the  construction  projects  of  the 
Housing  Bureau.  By  this  method  of  control  both  prices  and 
quantities  were  kept  in  hand,  because  the  Construction  Divi- 
sion and  the  War  Industries  Board  were  by  this  time  fairly 
if  not  exceptionally  well  equipped  to  protect  the  govern- 
ment against  anything  like  rampant  profiteering.  For,  next 
to  the  navy,  the  War  Industries  Board  had  become  the  most 
highly  specialized  price  determining  agency  at  the  govern- 
ment's command  in  war  contracting.  In  a  much  narrower, 
yet  equally  important  field,  the  Federal  Trade  Commission 
served  in  ascertaining  certain  basic  material  prices. 

In  the  matter  of  wages,  the  Housing  Bureau  (later,  the 
Housing  Corporation)  was  governed   more  largely  by  local 

.    *  Hearings  on  Senate  Resolution  371,  Part  i,  pp.  74-77. 


274  GOVERNMENT   WAR   CONTRACTS 

conditions.  At  navy  yard  projects  it  found  a  predetermined 
schedule  of  wages  in  vogue,  and  that  had  much  to  do  with  the 
prevaiHng  wage  level  in  the  locality.  The  contractor  was 
restricted  to  the  going  rates  of  wages,  unless  authorized  by 
the  bureau  to  depart  from  that  basis.  These  varied  with 
changes  in  the  conditions  affecting  employment.  But  it  must 
not  be  thought  that  the  contractor  was  at  all  free  to  go  out 
and  bring  in  workers  at  any  rate  of  wages  that  he  might  elect 
to  pay,  just  to  get  them.  That  was  not  the  case,  because 
there  was  an  Industrial  Relations  Committee  that  watched 
the  wage  question  very  carefully.  Besides  this  supervision  of 
the  general  wage  level,  so  as  to  protect  the  government  against 
fictitiously  high  wage  costs,  thus  inflating  the  cost  of  the 
project,  the  Housing  Bureau's  own  auditor,  timekeepers  and 
checkers  were  on  the  premises  for  the  express  purpose  of  seeing 
that  the  government  was  not  overcharged.  And  beyond  that 
the  actual  payroll  of  every  project  was  forwarded  to  the  bu- 
reau's head  ofifice  for  viseing  every  week.  As  an  instance  of 
the  wages  paid,  the  following  schedule  of  rates  on  the  Wash- 
ington Plaza  project  may  serve,  overtime  being  at  double  or 
time  and  a  half  rate:^ 

Occupations 

Bricklayers 

Bricklayers'  helpers 

Common  labor 

Common  labor,  December  2 

Carpenters 

Plumbers 

Plumbers'  helpers 

Painters 

Plasterers 

Sheet  metal 

Steam  fitters 

Steam  fitters'  helpers 


Time 

1918 

Regular 

Over 

Nov.  6         Dec.  4 

$0.87 

$1.75 

$9.62           $7.00 

50 

•75 

5.22             4.00 

40 

.60 

4.10            3.20 

45 

360 

75 

1 .12 

7.78             6.00 

75 

1.50 

8.25             6.00 

35 

.70 

3.85             2.80 

75 

1.50 

8.25             6.00 

75 

1.50 

8.25             6.00 

75 

1.50 

8.25             6.00 

75 

1.50 

8.25             6.00 

40 

.80 

4.40             3.20 

This  work  was  done  on  the  eight-hour  basic  day,  with  the 
customary  additional  rate.  The  fall  in  wages  between  Novem- 
ber 6  and  December  4  shows  the  extent  of  reaction  resulting 
after  the  armistice  when  housing  policy  radically  changed. 

^  Hearings  on  Senate  Resolution  371,  Part  i,  p.  140. 


CHAPTER   XXVIII 

Cost  Keeping  Methods  on  Housing  Projects 

There  were  nearly  a  hundred  different  projects  in  the  build- 
ing program  of  the  United  States  Housing  Corporation  when 
the  armistice  forced  upon  the  management  the  change  of 
policy.  Between  sixty  and  seventy  of  these  had  been  awarded 
to  contractors  and  were  in  varied  stages  of  completion. 
These  were  located  in  the  eastern  States  mainly,  although  not 
a  few  were  at  localities  all  the  way  across  the  continent  with 
several  on  the  Pacific  coast.  They  included  not  only  housing 
facilities  for  the  war  workers  at  munition  making  centers,  but 
also  transportation  facilities  and  other  public  utilities,  such 
as  sewer  connections,  water  supplies  and  similar  utilities. 
The  capitalization  of  the  corporation  at  $100,000,000  with  an 
available  cash  fund  of  $60,000,000  is  further  indication  of  the 
range  of  accounting  operations  required  to  keep  in  hand  the 
work  of  such  wide  geographical  scope  and  of  such  a  complex 
and  varied  character.^ 

Control  of  Relations  Between  Corporation  and 

Contractor 

To  understand  the  methods  by  which  track  of  costs  was 
kept  in  the  course  of  these  projects,  one  must  keep  in  mind  the 
organization  under  which  the  work  was  conducted.  Around 
the  central  authority  in  control  were  gathered  responsible 
contracting  firms  selected  on  a  restricted  competitive  plan. 
These  brought  with  them  to  their  respective  jobs  their  own 
individual  methods  and  organization.  One  of  the  first  prob- 
lems was,  therefore,  to  standardize  these  methods  and  adjust 
these  organizations  so  as  to  get  the  most  economical  and  yet 
expeditious  and  satisfactory  teamwork  out  of  the  whole  cor- 
poration   program.     On    the    side   of   economical    execution 

'  Read  Testimony  of  President  Otto  M.  Eidlitz,  Hearings  on  Senate  Resolu- 
tion 371,  part  I,  pp.  8-26. 

275 
19 


276  GO\^RNMENT   WAR   CONTRACTS 

within  reasonable  cost  limits  the  method  of  keeping  track  of 
the  expenses  was  most  vital  to  the  success  of  the  undertakings. 
The  policy  followed  was  one  in  which,  while  it  left  the  con- 
tractor free  in  a  real  sense  to  handle  his  project  in  his  own  way 
so  far  as  control  of  men  and  handling  materials  were  con- 
cerned, it  none  the  less  recognized  the  necessity  of  exercising 
an  absolute  supervision  of  the  progress  of  the  work  and  the 
costs  of  the  contract  at  every  stage  of  advance  from  beginning 
to  end. 

This  policy  resulted  in  the  installation  of  a  system  of  prog- 
ress and  cost  reports  on  the  part  of  the  employer  of  the  con- 
tracting firm.  These  were  due  every  two  weeks.  More  fre- 
quent returns  might  have  interfered  with  the  operations,  and 
less  frequent  ones  admitted  of  unfavorable  developments 
getting  too  much  of  a  start  before  checks  could  be  applied  for 
correction.  By  this  plan,  the  Housing  Corporation,  with  its 
headquarters  at  Washington,  not  only  kept  in  contact  with 
the  manifold  elements  of  expense  in  each  project;  it  also  put 
into  the  program  a  group  of  specialists  fully  equipped  to 
cooperate  with  the  contractor  in  the  solution  of  his  problems, 
while  representing  the  government  in  the  progress  of  work  and 
in  cost  control.  The  type  of  men  thus  called  to  the  joint 
service  of  contractor  and  government  alike  at  headquarters 
included  a  works  superintendent,  inspectors,  engineers,  an 
auditor  and  a  cost  engineer.  "While  acting  with  the  con- 
tractor, these  men  remained  definitely  a  part  of  the  govern- 
ment organization,  assigned  not  only  to  assist  the  contractor 
but  also  to  see  that  he  performed  his  contract."  These  con- 
tracts were  of  the  cost  plus  a  fixed  fee  type. 

The  form  of  contract  itself — cost  plus  a  fixed  fee  graduated 
by  the  amount  of  outlay — made  necessary  that  some  stand- 
ardized method  of  protecting  the  government  be  introduced. 
In  these  cases  this  was  accomplished  in  part  by  the  selection 
of  contracting  companies  with  reference  to  their  trustworthi- 
ness or  dependability.  It  was,  furthermore,  in  part  secured 
by  the  government  insuring  the  operating  contractor  against 
losses  which  ordinarily  went  with  a  fixed  price  contract.     On 


WAR    CONTRACT    OPERATIONS  277 

his  part  the  contractor  agreed  to  put  at  the  service  of  the 
government  his  organization,  his  plant,  his  equipment,  his 
personal  responsibility,  his  business  connections  and  his  com- 
mand over  the  supply  of  labor  and  materials  for  the  construc- 
tion in  the  shortest  possible  time  of  the  buildings  contemplated 
in  the  contract.  This  method  of  selecting  the  contractor 
on  the  professional  basis  consists  in  picking  out  some  for 
special  consideration  from  a  large  list  of  contracting  firms 
whose  records  have  been  compiled  as  to  the  ability,  size  and 
standing  generally.  From  these  records  a  tentative  list  of  a 
half  a  dozen  of  the  most  desirable  ones  was  selected,  and  these 
were  invited  each  to  submit  a  concrete  proposal  as  to  (a) 
estimated  cost  of  the  project,  (b)  fee  desired  for  the  service  of 
management,  (c)  time  required  to  complete  the  work,  (d)  the 
proposed  organization  to  be  placed  at  the  work,  and  (e)  the 
machinery  to  be  supplied  and  its  value.  It  has  been  well 
said  that — 

From  the  viewpoint  of  the  contractor  nothing  is  now  left  which  he  may  sell 
except  his  engineering  skill  and  the  use  of  his  equipment.  The  government  fixes 
the  prices  of  material  and  labor,  controls  how  much  of  each  he  may  obtain  and 
where  he  may  obtain  it.  The  government  controls  transportation,  fixes  rates 
and  allots  cars  for  the  movement  of  materials.  The  government  controls  the 
money  market  and  indirectly  determines  who  may  borrow  money  and  at  what 
rates.  Therefore  the  contractor  is  not  much  attracted  by  advertisements  for 
lump  sum  bids.     .     .     . 

That  the  government  has  not  been  blind  to  the  conditions  is  indicated  by  the 
fact  that  most  of  its  work  during  the  past  year  has  been  let  on  the  fee  or  per- 
centage basis.i 

This  practice  of  awarding  contracts  on  a  fee  basis,  in  such  a 
way  that  the  fee  which  is  predetermined  is  increased  if  the 
total  cost  of  the  work  is  reduced  below  the  estimated  or  ofhcial 
cost,  establishes  an  inducement  to  economize  in  expenses.  It 
puts  a  premium  on  the  exercise  of  skill  in  management  which 
is  what  in  short  the  contractor  has  sold  to  the  government. 

On  the  four  large  construction  efforts  of  the  government,  the 
Construction  Division  of  the  War  Department  allowed  a 
percentage  of  profit  on  costs  ranging  from  2  to  7  per  cent  of 

^The  Independent,  New  York,  November  23,  1918,  pp.  254  ff.:  "Uncle  Sam — 
General  Contractor,"  by  C.  S.  Rindsfoos. 


278  GOVERNMENT  WAR   CONTRACTS 

total  cost.  The  Shipping  Board's  Housing  Committee 
allowed  the  contractor  4  per  cent,  while  the  Housing  Corpora- 
tion of  the  Labor  Department  paid  him  from  2  to  4  per  cent, 
according  to  the  size  of  the  project.  Of  course,  the  larger  the 
outlay  the  lower  the  rate  of  percentage  of  profit  on  costs,  but 
the  higher  the  sum  total  of  the  fee  earned.  Yet  this  applied 
only  up  to  a  maximum  limit,  beyond  which  no  contractor 
could  earn  a  larger  fee,  no  matter  how  large  the  gross  cost. 
This  limit  acted  as  a  fixed  price  feature.  The  plea  that 
economic  conditions  made  some  more  elastic  form  of  contract- 
ing necessary,  under  the  circumstances,  might  have  much 
more  weight,  had  not  the  Bureau  of  Yards  and  Docks,  Navy 
Department,  constructed  under  much  the  same  conditions 
735  public  works  projects  at  an  outlay  of  $84,700,000  during 
the  fiscal  year  of  191 8  (to  June  30),  all  of  which  contracts 
were  based,  with  few  exceptions,  on  competitive  bids  after 
public  advertisement.^  In  these  cases  the  government  bought 
the  materials  at  standard  prices  and  turned  them  over  to 
the  contractors.  It  was  done  without  lowering  standards  of 
workmanship  or  inspection. 

Work  of  the  Cost  Engineering  Section 

Within  the  lines  of  policy  just  described  the  actual  functions 
of  control  over  contractual  costs  were,  of  course,  exercised  by 
the  cost  engineer.  As  developed  by  the  Housing  Corpora- 
tion this  section  had  two  definite  functions.  Its  duties  were 
to  compile  promptly  and  accurately  comparable  records  of 
the  progress  and  cost  of  the  work  performed;  and,  secondly, 
to  utilize  these  progress  and  cost  returns  for  the  improvement 
of  conditions,  so  that  progress  may  be  accelerated  and  costs 
reduced  wherever  possible.  This  work  is  quite  distinct  from 
the  routine  bookkeeping  and  auditing  functions,  although  as 
a  matter  of  course  the  two  divisions  of  service  cooperated 
in  the  distribution  of  costs  to  certain  accounts,  as  the  cost 
engineering  section  might  require. 

An  excellent  analysis  of  the  work  of  the  Housing  Corpora- 

1  Annual  Report,  Bureau  of  Yards  and  Docks,  Navy  Department,  1918,  p.  7. 


WAR   CONTRACT   OPERATIONS  279 

tion  in  its  cost  keeping  methods  is  given  in  the  Engineering 
News-Record  of  August  7,  1919,  describing  the  system  gener- 
ally as  follows: 

The  system  adopted  may  be  divided  broadly  into  field  and  office  methods. 
Because  of  many  considerations,  it  was  determined  to  make  the  field  do  all  the 
work  possible,  leaving  only  the  planning,  systematizing,  directing,  coordinating 
and  gleaning  to  be  done  at  headquarters.  The  principal  advantage  of  doing  it 
this  way,  rather  than  by  concentrating  the  work  at  Washington,  was  that  it  made 
the  system  so  flexible  that  it  could  be  applied  to  one  building  only  or  to  a  thousand 
towns  with  very  little  difference  in  the  headquarters  force.  To  do  this,  resident 
•cost  engineers  had  to  be  intensively  trained  in  the  Washington  office,  in  order 
that  they  might  be  sent  to  the  field  thoroughly  conversant  with  the  duties 
required. 

One  of  the  most  notable  experiences  in  the  entire  range  of 
war  contracting  was  that  of  selecting  the  types  of  talent  for 
meeting  the  emergency  requirements  in  the  office  or  field  as 
the  case  might  be.  In  many  of  these  emergency  situations 
it  was  not  the  technical  so  much  as  the  general  training  that 
gave  the  would-be  incumbent  the  entree  into  the  particular 
position  of  urgent  usefulness.  The  grasp  of  general  princi- 
ples involved  in  these  projects  and  the  acquaintance  with  the 
general  methods  by  which  constructive  results  are  measured 
were  the  determining  factors  in  selection  of  men.  To  con- 
tinue the  statement  of  the  cost  controlling  problem: 

The  men  themselves  are  the  most  important  part  of  the  system.  If  we  could 
not  have  secured  good  men  we  could  not  have  worked  the  system.  As  the  system 
had  to  be  flexible  though  standardized,  it  was  necessary  to  employ  men  who  were 
themselves  flexible  though  standardized.  Of  all  classes  of  men,  those  with  an 
engineering  training  seemed  to  possess  this  quality  of  adjusting  themselves  to 
conditions  as  they  find  them,  better  than  any  other  class.  This  is  because  they 
are  taught  to  take  what  they  find  and  create  out  of  it  what  they  want.  Their 
training  enables  them  to  see  broadly  the  purpose  back  of  their  routine  work  and 
thus  to  grasp  the  important  and  to  disregard  the  irrelevant.^ 

The  personnel  of  the  central  staff  as  it  related  to  progress  of 
work  and  cost  control,  apart  from  the  few  leading  corporate 
officers,  included  the  following: 

^  The  title  of  the  article  from  which  this  and  the  preceding  quotation  are  taken 
is  "Keeping  the  Cost  of  Building  the  Government  Houses,"  by  John  C.  Prior  and 
Herbert  P.  Green,  respectively  chief  cost  engineer  and  assistant  chief  cost  engineer 
for  the  U.  S.  Housing  Corporation.  Engineering  News-Record,  August  7,  1919, 
McGraw  Hill  Co.,  Inc.,  New  York. 


280  GOVERNMENT   WAR   CONTRACTS 

1.  ^Manager  of  the  Construction  Division,  whose  assistant 
had  as  his  duties  the  analysis  of  reports  for  information  and 
work  with  contractors  and  the  works  superintendent  to 
devise  means  whereby  cost  may  be  reduced  and  progress 
expedited. 

2.  Chief  cost  engineer,  who  formulated  policies,  organized 
developments  and  correlated  activities,  and  with  whom  were 
directly  associated — 

(a)  The  assistant  cost  engineer,  whose  duties  were  to 
systematize  and  standardize  operation  and  information  and 
to  enhance  the  general  efficiency  of  the  organization. 

(b)  The  general  field  cost  engineer,  to  coordinate  field 
activities,  obtain  official  estimates,  educate  assistants  and  act 
as  field  representative  of  the  chief  cost  engineer. 

These  were  the  essential  features  of  the  system  as  located 
at  Washington.  They  had,  of  course,  their  various  office 
assistants  and  clerical  forces.  These  together  comprised  the 
office  personnel  at  headquarters. 

The  other  part  of  this  line-and-staff  system  of  control  is  seen 
in  the  organization  of  the  individual  project.  There  the  works 
superintendent  was  in  direct  charge  with  his  field  auditors, 
engineers  and  inspectors  working  out  the  specifications  with 
the  contractor.  For  purposes  of  cost  keeping,  however,  the 
cost  engineer  on  the  spot  is  the  most  vital  official.  With  his 
assistants  and  coworkers  in  the  other  recording  functions  he 
is  enabled  to  prepare  cost  reports,  to  record  progress  of  the 
project  and  to  cover  any  special  phase  of  the  operations 
required  by  the  central  office.  It  is  not  easy  to  overestimate 
the  value  of  this  part  of  the  control  service.  The  project 
cost  engineer,  by  the  grasp  of  his  functions,  by  the  power  of 
massing  results  and  by  his  clarity  of  insight  into  relations  per- 
forms the  unique  part  of  making  facts  inferentially  valuable. 
Instead  of  being  a  mere  collector  of  facts  in  the  mass,  he 
becomes  the  selector  of  the  facts  which  prove  or  disprove 
hypotheses,  bring  out  into  bold  relief  concurrent  relations  and 
show  what  measure  of  cause  and  effect  there  may  inhere 
between  them.    In  the  short  period  of  the  operation  of  the  Hous- 


WAR  CONTRACT  OPERATIONS  28 1 

ing  Corporation  these  applications  of  the  statistical  methods  of 
measurement  of  construction  and  financial  results,  in  the 
hands  of  competent  engineering  direction,  yielded  most 
valuable  checks  on  costs.  In  doing  that  they  also  made  dis- 
tinct contributions  to  the  policy  of  employer  and  contractor 
working  on  a  project  on  a  common  scientific  basis. 

Cost  Control  as  Affecting  the  Contractor 

Without  going  into  the  minute  details  of  forms  and  schedules, 
it  is  sufficient  here  to  point  out  that  the  basis  of  this  working 
arrangement  for  both  control  of  cost  and  for  the  contractor's 
guidance  was  the  estimate  of  the  probable  cost  of  the  work — a 
statement  which  comprised  an  integral  part  of  his  bid  for  the 
job.  Even  though  the  government  paid  the  bills,  it  was  of 
vast  importance  to  know  from  the  several  available  con- 
tractors at  what  expense  they  provisionally  estimated  the 
undertaking.  The  one  chosen  for  the  project  then  reviewed 
his  estimate  of  probable  cost.  This  consisted  rather  in  re- 
writing the  items  into  forms  prepared  by  the  Cost  Engineering 
Section,  in  the  light  of  full  instructions  as  to  classification  and 
subdivision  of  items,  than  in  any  considerable  change  of  data 
based  on  reconsideration.  This  official  estimate  is  the  docu- 
mentary standard  by  which  the  entire  project  in  every  state  is 
to  be  tested  both  as  to  time  required  and  as  to  outlay  thereon. 

Although  this  official  estimate  is  of  more  or  less  tentative 
character  it  serves  the  useful  purpose  of  affording  a  common 
point  of  departure  in  the  absence  of  a  formal  contract  in 
urgent  emergency  work.  In  such  emergency  projects  where 
detailed  specifications  and  final  drawings  can  not  be  prepared, 
some  such  preliminary  estimate  is  necessary.  One  of  the 
seeming  disadvantages  would  of  course  lie  in  the  temptation 
of  the  contractor  to  overestimate  costs.  But  against  that  is 
the  risk  he  runs  of  rival  bidders  being  chosen  because  of  their 
bids  conforming  more  exactly  to  the  state  of  the  market  costs, 
or  of  costs  where  the  government  controls  the  material  prices. 
In  the  absence,  however,  of  a  rival,  an  overestimate  would 
obviously  work  to  the  contractor's  gain,  especially  where  a 


282  GOVERNMENT   WAR   CONTRACTS 

bonus  say  of  25  per  cent  is  offered  for  all  the  amount  by 
which  he  brings  the  actual  below  the  estimated  cost.  But  the 
government's  own  estimate  is  some  insurance  against  that. 
The  advantage  of  a  higher  estimate  is  also  obvious  for  him  if 
the  contractor  is  to  be  penalized  by  making  him  pay  25  per 
cent  of  the  excess  cost  over  the  preliminary  or  official  estimate. 
The  better  method  of  safeguarding  against  these  contingencies 
lies  in  the  existence  of  a  cost  keeping  staff  whose  check  on  the 
official  estimate  may  be  made  of  service  from  the  start.  Even 
in  the  selection  of  the  contractor,  whose  figures  on  equipment, 
rentals,  salaries,  etc.,  enter  into  the  provisional  cost  estimate, 
such  checking  is  fundamental. 

There  are  other  aspects  of  the  cost  plus  fixed  fee  contract 
that  in  the  experience  of  the  Housing  Corporation  might  well 
be  given  consideration.  In  a  previous  chapter  the  subject 
was  discussed  under  the  Emergency  Construction  Committee's 
work  on  camps  and  cantonments.  In  that  branch  of  govern- 
ment contracting  the  percentage  profit  on  gross  costs  was 
much  criticized  and,  shortly  after  the  first  set  of  contracts  were 
let,  abandoned  or  safeguarded  by  special  provisions  more 
protective  of  the  public  interest.  But  the  principle  survived, 
and  rightly  so,  owing  to  better  supervision.  The  Housing 
Corporation,  with  this  criticism  in  mind,  avoided  most  of 
these  mistakes  by  resorting  to  the  fixed  fee  compensation  with 
bonus  and  penalty  clauses  attached,  and  by  pinning  down  the 
contractor  to  the  official  estimate.  Equitable  provisions  were 
made  for  delays  and  changes  in  plans  for  which  the  contractor 
could  not  properly  be  held  responsible.  But  the  greater  pro- 
tection to  the  government's  interest  in  the  premises  was  no 
doubt  to  be  found  in  the  presence  of  a  working  cost  keeping 
organization.  Thereby  not  only  costs  as  they  came  in  from 
the  contractor's  sheets  were  being  checked  effectively  in  the 
light  of  market  values,  but  a  system  of  price  determining  was 
at  hand  by  which  the  government  could  step  in  as  the  supplier 
of  materials.  Where  the  market  has  come  too  much  under 
the  sway  of  speculative  conditions  affecting  supply  and  demand 
a  remedy  could  always  be  found  in  commandeering  the  needed 
materials  or  equipment. 


WAR   CONTRACT    OPERATIONS  283 

Where  time  is,  as  it  was  here,  the  essence  of  the  contract, 
control  of  progress  and  cost  must  prove  to  be  of  a  low  state  of 
efficiency  before  costing  more  than  it  is  worth.  This  was  one 
of  the  criticisms  of  the  Housing  Corporation — that  it  was 
topheavy  with  overhead  costs — when  late  in  1919,  the  House 
voted  to  abolish  the  Housing  Bureau  on  the  ground  of  extrav- 
agant expenditures.  One  of  the  most  valuable  results  of  this 
system  was,  in  spite  of  later  criticism,  to  disclose  at  what 
stages  of  completion  the  working  force  should  be  increased 
or  decreased.  These  housing  projects  showed  in  a  general 
way,  according  to  the  cost  engineers,  that  "the  working  force 
should  be  built  up  from  a  nucleus  of  about  10  per  cent  of  the 
whole  at  the  beginning  to  nearly  the  maximum  force  when  25 
per  cent  of  the  allowed  time  has  expired,  and  that  the  maxi- 
mum should  occur  during  the  period  from  45  to  60  per  cent, 
but  nearly  the  maximum  should  be  maintained  until  80  per 
cent  of  the  allowed  time  is  gone.  The  force  is  then  reduced 
rapidly  to  the  size  required  for  completing  odds  and  ends  and 
for  cleaning  up."^  Out  of  such  results  as  these  it  is  easy  to 
see  that  cost  reports  and  progress  records  must,  if  promptly 
and  accurately  furnished,  enable  those  responsible  for  the 
construction  to  locate  unsound  conditions  of  expense  and  to 
detect  in  what  respects  the  schedule  of  progress  needs  atten- 
tion. Then  it  is  only  a  question  of  immediacy  of  application 
to  correct  the  abnormal  and  to  concentrate  resources  on  the 
advance  of  the  project  along  normal  lines. 

It  is  probably  true  that  in  the  administration  of  the  Housing 
Bureau,  in  the  Department  of  Labor,  there  was  an  overloading 
of  salaries.  President  Eidlitz  served  without  salary  through- 
out his  term  of  incumbency.  In  the  liquidation  of  the  prop- 
erties after  the  war,  prices  for  houses  realized  were  little  below 
their  cost.  This  indicates  at  least  that  they  had  not  been 
extravagantly  built.  From  460  houses  of  four  to  six  rooms, 
two-story,  in  Rock  Island  Arsenal  territory,  a  price  of  $3,000 
each  was  realized  in  October,  191 9.  Ninety-five  per  cent  of 
the  buyers  were  occupying  workmen. ^ 

^Engineering  News-Record,  August  7,  1919,  p.  259. 

^  New  York  Times,  October  26,  1919,  in  dispatch  from  Rock  Island,  Illinois. 


CHAPTER   XXIX 

Housing  Contract  Policy  as  Affected  by  the  Armistice 

One  of  the  most  difhcult  questions  to  settle  as  a  result  of 
the  suspension  of  hostilities  was  that  of  what  was  to  be  done 
about  the  uncompleted  buildings.  Instantly  the  Bureau  of 
Industrial  Housing  began  a  policy  of  retrenchment.^  On 
December  5,  a  Senate  resolution  was  adopted  by  the  Com- 
mittee on  Buildings  and  Grounds,  reported  out  December 
10  and  passed  December  12,  making  it  a  joint  resolution  of 
both  houses  of  Congress  and  directing  the  United  States 
Housing  Corporation  to  suspend  work  upon  all  buildings 
where  construction  was  not  more  than  seventy-five  per  cent 
completed,  and  to  cancel  all  contracts  for  furniture.- 

This  affected  the  entire  program  of  providing  housing,  local 
transportation  and  other  general  community  utilities  at 
arsenals  and  other  industries  where  industrial  workers  were 
engaged.  The  policy  of  these  industries  varied  as  to  whether 
work  was  to  be  prosecuted,  reduced  or  suspended  entirely. 
The  controlling  consideration  was  the  precaution  not  to  dis- 
lodge labor  in  any  considerable  numbers  that  might  work 
hardship  to  workers  in  adjusting  themselves  to  peace  condi- 
tions. Between  completion  of  going  jobs,  contraction  and 
cancelation,  practically  every  contract  had  to  be  dealt  with 
on  its  merits.  That  was  in  turn  affected  by  the  broader 
questions  of  military  and  naval  policy.  At  the  navy  yards 
and  at  public  arsenals  and  on  all  other  outside  projects  which 
it  was  thought  wise  to  keep  going,  the  policy  adopted  was  to 
eliminate  all  overtime  and  Sunday  work.  But  this  left  un- 
disposed of  all  such  projects  as  to  whose  salvage  value  there 
was  difference  of  judgment,  where  completion  might  more 
than  correspondingly  enhance  the  salvage  value  to  possible 
purchasers,  or  for  public  use. 

1  Letter  of  Secretary  of  Labor  Wilson  to  Director  Otto  M.  Eidlitz,  November 
26,  1918,  relating  to  policy  and  projects. 

^  Senate  Joint  Resolution,  65th  Cong.,  3d  Sess.,  sec.  2. 

284 


WAR   CONTRACT   OPERATIONS    *  285 

The  main  facts  as  to  the  work  of  the  Housing  Corporation 
as  of  December  2,  191 8,  when  the  Senate  inquiry  into  the 
policy  of  Hquidation  was  being  conducted,  indicate  that  there 
were  98  projects  under  construction  contracts.  Of  these  60, 
or  almost  three-fifths,  were  let.  Plans  were  completed  for  25, 
ready  to  be  awarded.  Of  the  remaining  13,  construction  was 
postponed  on  5  projects,  on  5  others  plans  were  in  preparation, 
and  on  3  the  investigations  had  been  completed.  Of  the  60 
projects  awarded  23  had  been  canceled  and  the  losses  were 
being  adjusted.  So  prompt  was  this  part  of  the  procedure 
following  cancelation  that  within  three  or  four  weeks  adjust- 
ment was  effected  with  a  comparatively  small  loss  to  the 
government.  Of  the  remaining  37  contracts,  15  were  cur- 
tailed, leaving  only  22  projects  to  proceed  as  contracted  for. 
Thus  on  December  2,  three  wrecks  after  the  armistice,  there 
were  37  out  of  98  projects  still  going  on  either  as  planned  or 
as  curtailed.  This  curtailing  was  effected,  among  other  ways, 
by  canceling  or  suspending  orders  for  materials,  supplies  or 
other  forms  of  outlay  not  yet  actually  involved  in  building 
operations.  "• 

The  Housing  Bureau  was  organized  in  May,  and  took  the 
form  of  the  corporation  in  July.  Its  appropriation  was  then 
made  $100,000,000.  By  December  2,  191 8,  or  within  six 
months  it  had  contracts  outstanding  as  follows,  showing  the 
extent  of  its  liquidation  in  funds: 

Amount  of  Estimated  Final 

Classes  of  Projects                               Contracts  Cost 

Projects  to  proceed $23,073,961  $23,073,961 

Projects  to  be  curtailed 17,330,957  11,297,471 

Projects  to  be  canceled 17,627,952  4,053,483 

Projects  canceled  without  loss 5458,275  

Total $63,491,146  $38,429,915 

Housing  Corporation  Handles  Own  Cancelations 

The  policy  of  the  Housing  Corporation  varied  with  the 
local  conditions  as  the  war  came  to  an  end.  It  had,  for  in- 
stance, commandeered  between  400  and  500  houses,  for  rent- 

^ Testimony  of  Director  Eidlitz,  Hearings  on  Senate  Resolution  371,  part  i, 
p.  129. 


286  GOVERNMENT   WAR   CONTRACTS 

ing  only  on  terms  mutually  agreeable  to  owner  and  the  Hous- 
ing Bureau.  These  were  at  once  turned  back,  so  that  by  the 
end  of  two  months  two-thirds  were  in  the  hands  of  the  owners. 

On  its  building  contracts  the  corporation  had  in  hand,  as  has 
been  stated,  98  projects  in  all.  On  November  11,  51  of  these 
were  abandoned,  on  15  work  was  curtailed,  and  22  were  pro- 
ceeded with  as  planned. 

The  kind  of  project  proceeded  with  depended  on  its  stage 
of  completion,  its  ser^dce  for  housing  locally  as  a  marketable 
or  needed  improvement  and  on  the  nature  of  the  project.  At 
Havre  de  Grace,  Maryland,  80  houses,  74.2  to  87  per  cent 
completed,  on  owned  land,  and  much  in  demand  for  civilian 
employes  at  the  Artillery  Proving  Grounds,  were  completed. 
A  nearby  government  activity  of  a  permanent  character, 
requiring  added  housing,  of  course,  called  for  completing 
improvements.  At  Bridgeport,  however,  the  question  of 
adjacent  war  work  only  in  part  affected  the  question  of  com- 
pleting the  338  houses  and  apartments  of  a  more  or  less  per- 
manent type.  These  were  62  to  85  per  cent  completed,  and  the 
locality  was  in  need  of  these  5  different  projects  for  housing 
its  own  existing  people.  The  Housing  Corporation  here,  urged 
also  by  the  business  interests,  were  in  favor  of  completing 
and  selling,  as  against  attempting  to  market  "as  is,"  by  trying 
to  sell  a  half  finished  project.  The  Housing  Corporation  had 
spent  $3,462,428  and  estimated  that  $613,894  would  finish 
the  5  projects. 


PART  III— LIQUIDATION,   CANCELATION 
AND  ADJUSTMENT 

CHAPTER  I 
Liquidation  of  Contractual  Assets 

Government  war  contracts  have  thus  far  been  considered 
from  the  two  aspects  of  the  principles  of  procedure  and  the 
practices  of  administration  under  war  operations.  We  now 
come  to  the  point  of  summing  up  results — of  liquidating  the 
no  longer  needed  resources,  of  pointing  out  the  mistakes  and 
the  merits  of  operations  in  the  realms  of  administrative  and 
economic  values,  and  finally  of  formulating  such  conclusions 
as  may  be  warranted  by  a  scientific  study  of  the  facts  and 
factors  under  review. 

Liquidation  of  military  and  economic  resources  following 
the  end  of  war  Involves  one  of  the  most  vital  of  processes 
affecting  the  welfare  of  the  fighting  nation.  Regardless  of 
whether  victory  fell  to  one  belligerent  or  the  other,  liquidation 
may  be  so  badly  managed  as  to  mar  victory  or  Intensify 
defeat.  Much  of  the  moral  effect  of  triumph  may  be  dissi- 
pated and  turned  to  shame  by  the  bungling  and  incapable 
manner  in  which  the  transition  stage  back  to  peace  is  handled. 
Success  here  depends  primarily  on  the  transfer  of  the  nation's 
man  power  from  the  temporary  pursuit  of  war  to  the  per- 
manent occupations  of  peace.  If  that  be  done  constructively 
with  the  minimum  of  discontent  it  may  be  said  to  be  well  done. 
But  the  shift  of  man  power  depends  for  Its  success  on  the 
manner  In  which  the  economic  resources  are  released  and  the 
man  power  and  the  material  resources  coupled  up  so  as  to 
make  for  the  general  and  individual  welfare.  Transition  to 
peace  Is  always  a  critical  era- in  public  interest  and  national 
policy. 

287 


288  GOVERNMENT    WAR    CONTRACTS 

The  Problem  of  Settling  Unfinished  Contracts 

The  outstanding  problem  for  the  government  was  that  of 
closing  the  unfinished  contracts  as  they  stood  on  the  morning 
after  the  armistice  of  November  ii,  1918.  According  to  the 
testimony  of  the  Director  of  Finance  of  the  War  Department, 
there  were  on  that  date,  as  nearly  as  could  be  ascertained, 
24,281  contracts  and  agreements  in  force  in  all  bureaus. 
This  covers  all  war  activities  of  the  government.  The  orig- 
inal amount  of  commitments  embraced  in  these  contracts  and 
agreements  was  $6,056,000,000.  On  the  obligations  repre- 
sented by  that  amount  some  delivery  had  been  made.  The 
problem  of  deciding  what  deliveries  should  be  continued,  what 
ones  suspended  and  finally  what  ones  canceled  outright 
was  no  small  part  of  the  postwar  tasks  of  the  department. 
To  put  the  whole  matter  into  official  language,  the  paragraph 
of  Brigadier  General  H.  M.  Lord's  testimony  from  the 
Select  Committee's  Hearings  on  War  Expenditures  may  well 
be  quoted  in  full : 

The  total  amount  of  incompleted  portion  of  the  contracts  or  agreements  at  that 
date — the  amount  of  $6,056,000,000 — is  the  amount  involved  in  these  contracts 
on  which  some  delivery  had  been  made.  Now,  the  total  amount  of  the  undelivered 
portion  of  the  contracts  or  agreements  to  that  date — the  amount  we  would  still 
have  to  pay  if  they  continued  to  deliver — was  $3, 600,000,000. ^ 

How  much  would  it  take  to  effect  a  settlement  for  this  total 
of  undelivered  obligation  of  $3,600,000,000?  A  necessarily 
hasty  estimate  by  the  several  bureaus,  which  was  checked 
up  during  the  next  six  months  and  verified,  placed  the  total 
required  to  clear  the  decks  of  unfinished  contract  work  at  the 
comparatively  small  total  of  $705,000,000.  By  June  24,  1919, 
out  of  these  24,281  contracts  and  agreements  on  the  docket, 
17,200  had  been  approved  for  settlement  by  the  boards  of 
review  as  received  in  the  form  of  agreements  for  settlement 
through  the  various  district  claims  boards.  That  was  equal 
to  19.06  cents  on  the  dollar.  In  point  of  number  of  contracts 
cleared,  70.8  per  cent  of  the  total  had  been  settled  within 
little   more   than   seven   months.     The   exact   number   thus 

1  Hearings  on  War  Expenditures,  Sen  VI,  Vol.  II,  p.  2126. 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT  289 

agreed  upon  on  the  date  of  the  hearings  was  17,241  contracts, 
involving  obHgations  in  settlement  of  accounts  of  $179,280,- 
000,  of  which  there  had  been  paid  to  claimants,  under  these 
agreements,  $177,142,000,  or  little  more  than  99  per  cent. 

It  was  the  judgment  of  the  War  Department  that  many  of 
these  unfinished  contract  commitments  could  be  liquidated 
at  not  more  than  10  to  15  per  cent  of  the  cost  of  the  unfinished 
articles  on  hand.  It  might  be  considerably  less,  if  in  the 
discretion  of  the  Secretary  of  War  it  were  deemed  fair  and 
just  as  a  reimbursement  to  hold  the  contractor  harmless 
against  expenses  and  obligations  incurred  pursuant  to  the 
requirements  of  the  original  contract.  Later,  in  actual 
experience  with  the  application  of  the  Dent  Act  to  the  settle- 
ment of  the  so-called  informal  contracts,  or  procurement 
orders,  it  was  found  that  in  the  disposal  of  some  6,600  out 
of  probably  20,000  or  more,  the  government  settled  for  12 
or  13  per  cent  of  the  total  contractual  commitments  on  un- 
finished orders.^  It  was  the  purpose  of  the  department  in 
handling  these  unfinished  contracts  to  substitute  a  supple- 
mentary agreement  embodying  the  principle  of  not  making 
any  allowance  for  prospective  profits  on  these  unfinished 
products,  but  to  cover  all  claims  for  a  fair  and  just  settlement 
by  a  10  per  cent  allowance  on  the  cost  of  the  partly  finished 
goods. 2     All  finished  products  were  paid  for  at  contract  rates. 

It  is  well  worth  observing  how  theW'ar  Department  handled 
this  situation.  No  contracts  were  let  after  the  armistice. 
The  need  for  a  prompt  suspension  and  cancelation  of  all  con- 
tracts, most  of  which  were  reaching  the  maximum  production, 
was  recognized  by  the  offices  of  the  Directors  of  Munitions 
and  of  the  Division  of  Purchase  and  Storage.  These  two 
officials  probably  controlled  90  per  cent  of  the  contracts  in 
the  War  Department.  They  immediately  conferred  with  the 
Navy  Department  and  the  Shipping  Board — the  two  leading 
employers  on  war  work — by  which  the  hours  of  labor  were 

1  Hearings  on  War  Expenditures,  Ser.  VI,  part  38,  p.  2126. 

2  Hearings  on  House  Bill,  No.  13,274:  "Relative  to  Contracts,"  to  provide 
relief,  etc.,  p.  15,  in  Letter  of  Comptroller  of  the  Treasury  to  the  Secretary  of 
War,  November  25,  1918,  on  illegality  of  contracts. 


290  GO\'ERNMENT  WAR   CONTRACTS 

reduced  in  cutting  out  all  Sunday  work  and  all  overtime. 
The  slowing  down  led  many  men  who  had  left  their  old  jobs 
for  war  work  to  go  back  at  once.  That  quickly  relieved  the 
situation  almost  automatically.  Production  slowed  up  ac- 
cordingly. Here  let  the  Director  of  Munitions  state  the  plan 
followed,  beginning  with  the  day  after  the  armistice: 

A  study  was  then  immediately  made  of  the  requirements  and  the  state  of  pro- 
duction in  all  these  contracts.  Complete  immediate  cancelation  could  not  be  had 
for  many  reasons,  first,  because  in  the  case  of  a  contract  where  material  was  in 
process  a  cancelation  would  mean  we  would  lose  all  that  material.  A  great  deal 
of  it  was  75  or  80  per  cent  finished,  and  in  a  case  of  that  kind  we  would  prefer  to 
pay  the  remaining  20  per  cent  and  get  the  finished  article  rather  than  pay  80  per 
cent  and  have  a  complete  loss. 

The  case  of  a  rifle  is  perhaps  a  good  case  in  point.  We  are  completing  the  rifles 
that  were  in  process  so  that  in  all  cases  we  get  a  complete  rifle  rather  than  an  80 
per  cent  complete  rifle.  That  principle  was  applied  in  most  cases,  and  we  then 
met  with  the  Comptroller  of  the  Treasury  in  regard  to  payments,  because  a  prompt 
payment  to  these  contractors,  I  believe,  is  imperative.  Many  of  them,  because 
of  the  greatly  increased  cost  of  doing  business,  have  a  large  amount  of  money 
borrowed,  and  if  they  can  promptly  meet  their  difficulties  and  make  this  payment, 
that  will  allow  them  to  immediately  and  easily  turn  back  into  their  own  business, 
and  at  the  same  time  we  can  settle  the  claims  of  a  large  proportion  of  them.^ 

Here  a  long  anticipated  obstacle  arose.  In  the  pressure  to 
get  contractors  at  work  on  munitions,  the  contractor  during 
the  war  would  meet  the  official  of  the  government  and  in  a 
few  minutes  agree  upon  the  main  features  of  a  contract.  On 
the  strength  of  this  understanding  the  contract  commitments 
would  be  entered  into  by  the  contractor,  and  the  formal  con- 
tract follow  some  days  or  may  be  weeks  if  not  months  after. 
Meanwhile  the  contracting  officer  named  in  the  document  may 
have  gone  to  France.  This  resulted  in  informalities  for  which 
corrective  legislation  was  asked  of  Congress  in  December, 
but  not  really  supplied  until  March  2,  the  next  year  (19 19)  in 
the  Dent  Act. 

Referring  to  these  numerous  informal  contracts  Gen. 
George  W.  Goethals,  then  Director  of  Purchases,  makes  a 
helpful  summary  in  his  testimony  at  the  Hearings  on  House 
Bill   No.    13,274   (to  provide  relief  for  informal  contracts). 

^  Testimony  of  Benedict  Crowell,  Director  of  Munitions,  in  Hearings  on  House 
Bill  No.  13,274,  pp.  3-4. 


LIQUIDATION,   CANCELATION   AND  ADJUSTMENT  29 1 

To  correct  this  disability  to  effect  legally  a  prompt  settlement 
with  the  contractor,  he  said: 

There  are  three  classes  of  cases.  The  first  one  is  where  a  contract  has  been 
made  and  not  signed  by  the  proper  officer,  where  the  contractor  has  delivered  his 
material,  and  where  we  have  paid  him  for  it,  and  by  reason  of  the  fact  that  the 
contract  was  not  regularly  signed  the  payments  are  illegal.  The  second  case  is 
where  we  have  gotten  part  of  the  stuff,  but  where  no  contract  has  been  signed. 
The  third  case  is  where  we  have  given  an  order  to  a  contractor  to  make  prepara- 
tions to  go  to  work,  where  he  has  expended  the  money,  but  had  delivered  nothing 
under  the  contract  at  the  time  the  armistice  was  signed. 

Mr.  Greene:  The  presumption  is  that  the  government  does  not  undertake 
to  insure  these  contractors  against  any  speculative  risk. 

General  Goethals:  None  at  all;  it  is  simply  actual  cost  as  far  as  we  are  able 
to  determine  it.  The  method  of  procedure  is  that  we  notify  the  contractor  that 
his  contract  is  suspended  and  no  further  production  will  be  allowed.  The  con- 
tracting officer,  together  with  his  inspectors,  determine  how  much  has  been  ex- 
pended on  that  contract  and  what  is  properly  allowable.  That  goes  before  the 
bureau  board  of  review,  and  they  pass  upon  it,  and,  if  in  passing  upon  the  claim, 
it  receives  the  approval  of  the  chief  of  the  bureau,  the  claim  is  settled  beyond 
question.  The  next  case  is  where  there  is  a  disagreement.  If  that  can  not  be  set- 
tled by  the  bureau  board  of  review,  it  comes  to  a  part  of  my  organization,  which  is 
called  the  board  of  contract  adjustment,  which  passes  upon  it,  and  there  decision 
is  final. 

So  the  machinery  is  set  up  for  the  closing  of  these  contracts,  and  had  there  been 
no  illegality  in  the  signing  of  the  contracts  this  legislation  would  never  have  come 
up  and  we  would  have  settled  the  claims  by  the  machinery  which  has  been  set  up, 
and  the  Congress  would  not  have  been  appealed  to.^ 

It  was  much  to  the  credit  of  the  engineering  talent  in  office 
in  the  War  Department  that  it  had  ready  at  hand  fully  or- 
ganized machinery  to  liquidate  these  thousands  of  contracts 
almost  as  soon  as  the  war  stopped.  The  fact  is  that  the 
War  Department,  early  in  and  during  the  year  191 8,  under- 
went a  comprehensive  reorganization  of  its  business  arrange- 
ments. Excepting  in  the  hopelessly  muddled  Aircraft  Pro- 
duction, where  the  correction  began  too  late,  and  in  some  other 
minor  divisions,  these  reorganizations  showed  excellent  results. 
As  a  consequence,  when  the  commercial  organizations  and 
the  bankers  came  along  with  their  schemes  for  the  settlement 
of  these  outstanding  war  contracts,  to  stave  off  anticipated 
bankruptcy,  they  found  that  the  War  authorities,  in  both  the 

1  Hearings  on  House  Bill  No.  13,274,  p.  8. 
20 


292  GOVERNMENT   WAR   CONTRACTS 

Ordnance  and  the  Purchase  Division  or  Quartermaster 
General's  OjEifice,  had  anticipated  their  suggestions.  In  fact 
the  War  Department  had  made  unnecessary  the  proposal  to 
set  up  an  entirely  new  set  of  liquidating  machinery  in  which 
civilian  representatives  of  these  outside  organizations  were 
to  share  the  duties  of  adjustment.  The  bureau-and-board 
system,  although  it  utilized  much  civilian  talent  to  advantage, 
as  the  War  Department  actually  organized  the  work  of  settle- 
ment, was  not  wholly  satisfactory.  Some  of  the  district 
boards  were  splendidly  equipped  with  most  competent  men 
both  of  civil  and  military  training,  as  the  Ordnance  Board  of 
the  Philadelphia  District.  Others  were  in  far  less  competent 
hands,  as  in  some  of  the  Chicago  district's  ordnance  settle- 
ments. 

One  of  the  basic  factors  in  determining  the  policy  to  be 
pursued  at  the  end  of  hostilities  was  that  of  the  size  of  the 
army.  During  the  war  this  had  grown  from  a  total  of  practi- 
cally 100,000  regulars  to  an  establishment  whose  supplies 
and  munitions  were  being  contracted  for  on  the  basis  of  an 
army  of  5,000,000.  In  due  time  the  requisite  economic 
mechanism  for  the  equipping  of  these  millions  of  soldiers 
would  turn  out  billions  of  supplies  and  means  of  combat. 
Some  of  the  industrial  undertakings  had  already  reached  the 
peak  of  the  load  when  the  armistice  came.  Others  were 
rapidly  approaching  their  maximum  for  the  5,000,000  army 
needs,  while  still  others  were  expanding  in  view  of  the  full 
measure  of  military  effort  during  the  expected  campaign  of 
191 9.  The  cumulative  volume  of  economic  effort  on  a  nation- 
wide scale  did  not,  probably,  impress  itself  upon  the  authori- 
ties until  the  suspension  of  hostilities.  Then  for  a  very  brief 
period  the  flow  of  military  resources  became  so  imminent  as  to 
require  quick  action.  In  some  lines  cancelation  had  actually 
preceded  the  armistice,  but  generally  the  inpouring  of  supplies 
and  munitions  needed  only  a  day  or  two  to  threaten  a  condi- 
tion of  supercongestion  throughout  the  traffic  world  unless 
initial  shipping  were  arrested  at  once.  The  reversal  of  this 
immense  machinery  of  production  and  transportation  thus 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  293 

became  the  most  momentous  problem  before  the  War  authori- 
ties. The  situation  was  fraught  with  the  most  far  reaching 
possibiHties,  owing  not  only  to  the  numerous  thousands  of  out- 
standing contracts  of  the  government  with  its  own  citizens 
at  home  but  also  with  other  governments  throughout  the 
world  of  Allied  and  neutral  relationship. 

Supply  Situation  at  Armistice  and  After 

In  war  there  is  no  safety  in  buying  supplies  on  the  hand-to- 
mouth  basis.  On  the  date  of  the  armistice,  Pershing's  army 
had  three  months'  supplies  at  hand,  but  the  purchasing  con- 
tract work  was  no  less  than  eight  months  ahead  of  that  date. 
General  March,  then  Chief  of  Staff,  explained  to  the  War 
Expenditures  Committee  of  the  House  (July,  1919),  that — 

Eight  months  ahead  of  the  armistice,  on  November  ii,  1918,  we  were  working 
on  a  program  which  contemplated  laying  down  in  March,  1919,  an  army  of  80 
divisions  in  France  and  18  at  home  which  was  about  a  million  more  than  we  had 
on  November  11,  when  we  cut  ofiF  and  stopped  it.  But  the  buying  going  on  in 
September,  October  and  November  was  not  at  all  for  these  months  but  for  the 
months  ahead,  for  the  spring  campaign;  so  on  the  day  when  the  armistice  was 
signed,  and  when  I  shut  down  everything  in  the  United  States,  the  storehouses  all 
along  the  seacoast  were  filled  with  supplies,  and  trains  were  filled  with  supplies  of 
foodstuffs  making  for  the  seacoast  to  go  across  the  water,  and  food  products  in 
the  course  of  delivery  all  the  way  along  back.  When  the  armistice  was  signed  we 
stopped  trains  and  held  trains  filled  with  food  products  a  long  time,  until  we  could 
get  storage  for  them,  and  we  encouraged  contractors  to  store  stufT  and  hold  it  for 
us  until  we  could  dispose  of  it.  We  had  a  three  months'  supply  on  November  11, 
which  was  based  not  on  the  strength  of  the  army  of  that  date,  but  based  on  the 
spring  drive  of  the  next  year.  We  were  buying  supplies  and  laying  in  supplies, 
not  for  an  army  of  more  than  3,000,000  men,  but  for  an  army  of  more  than 
5,000,000  men.i 

This  heaping  up  of  supplies,  under  the  impetus  of  the  war 
program  based  on  the  spring  drive  of  191 9,  was  going  on  while 
the  army  was  being  demobilized  almost  from  the  day  of  the 
armistice,  until  the  reservoirs  of  commerce  were  overflowing 
with  foodstuffs  under  military  control.  The  first  check  came 
with  the  order  of  November  30,  in  which  General  March 
declared  a  surplus  of  foodstuffs.  Nevertheless,  actual  sales 
did  not  really  take  place  until  May  5,  1919. 

^  Congressional  Record,  July  29,  1919,  p.  3546. 


294  GOVERNMENT    WAR    CONTRACTS 

The  situation  thus  indicated  was  not  simplified  by  the  fact 
that  there  was  much  doubt  as  to  the  permanency  of  the 
armistice.  Under  the  terms  of  the  armistice  a  resumption  of 
hostilities  was  quite  possible  at  any  time,  and  the  possibilities 
of  a  resumption  had  to  be  kept  in  mind  in  formulating  any 
program  for  demobilization  of  troops  and  consequent  release 
of  supplies.  The  \\'ar  Department  nevertheless  discontinued 
forthwith  the  transporting  of  foods  to  Europe,  stopped  the 
mobilization  of  troops  in  this  country  and  began  a  progressive 
demobilization  of  men.  It  also  suspended  existing  contracts 
for  the  procurement  of  supplies  and  "took  all  possible  steps  to 
bring  about  a  reduction  of  war  expenditures.  In  the  mean- 
time, vast  quantities  of  supplies  already  manufactured  were 
in  hand  and  a  continued  stream  of  deliveries  from  manu- 
facturers and  producers  daily  increased  the  stock  of  the 
department." 

Thus  wrote  the  Secretary  of  War  under  date  of  July  26, 
1 91 9,  in  describing  the  factors  w^hich  had  to  be  taken  into 
account  in  liquidating  war  supplies.  To  quote  his  summary 
more  fully : 

These  supplies  were  of  practically  every  nature;  foodstuffs,  clothing,  imple- 
ments, machinery,  vehicles,  thousands  of  items,  some  having  little  usefulness  in 
civil  life  by  reason  of  their  special  adaptation  to  army  use,  many  of  them  being 
equally  valuable  for  peace  time  and  war  time  usefulness.  The  data  in  the  hands 
of  the  department  with  reference  to  the  speed  with  which  demobilization  could  be 
effected  were  necessarily  speculative.  How  large  an  army  should  be  retained, 
and  for  how  long,  required  to  be  carefully  determined.  The  situation  in  Europe, 
the  rapidity  with  which  transportation  home  could  be  supplied,  industrial  condi- 
tions in  the  United  States,  were  all  elements  to  be  considered.  As  a  result  it  was 
not  possible  instantly  to  place  upon  the  market  for  sale  to  the  general  public  the 
supplies  held  in  storage  by  the  department.  It  was  necessary  first  to  make  an 
accurate  forecast  of  the  army  needs;  second,  by  proper  inventory  and  examination 
to  determine  quantities  on  hand;  and,  third,  to  devise  methods  of  disposing  of 
these  commodities  which  would  take  into  consideration  the  perishable  nature  of 
some  of  them  and  the  effect  of  their  sale  upon  producers  of  raw  material  and  labor 
conditions  in  the  country. 1 

Plausible  as  this  statement  of  policy  may  appear  at  first 
thought,  its  merit  has  to  be  tested  rather  by  the  sequel  than 

^  From  Letter  of  Secretary  of  VVar,'to  Hon.  H.  D,  Flood,  Appendix  to  Minority 
Report,  H.  R.  No.  171,  dated  July  26,  1919,  p.  15. 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  295 

by  the  sense  of  the  statement.  To  those  who  have  examined 
the  situation  from  the  viewpoint  of  Hquidation  upon  prices 
and  producing  interests,  the  department  seemed  disposed  to 
lean  quite  too  far  toward  the  side  of  the  producers  and  the 
commercial  distributors  and  to  overlook  the  interests  of  the 
consuming  public  in  the  premises.  So  also  was  the  regard 
for  the  wage  earner  who  had  gotten  about  all  he  asked  for  in 
the  war.  The  price  paying  public  in  actual  liquidating  prac- 
tice was  thus  again  made  to  occupy  the  role  of  the  "forgotten 
man."  With  prices  at  the  top  notch,  there  was  far  less  danger 
to  the  public  peace  and  to  the  general  economic  welfare  of  the 
great  consuming  public  in  putting  on  the  market  some  of  the 
vast  accumulations  of  foodstuffs  at  once,  than  there  was  in 
the  official  fear  of  the  Secretary  of  War,  in  "inconsiderately 
tendering  its  vast  accumulations  of  supplies  to  the  public  con- 
sumption while  it  was  demobilizing  its  industrial  and  military 
forces."^  As  matters  turned  out,  the  failure  to  do  so  enabled 
wholesalers,  manufacturers  and  retailers  to  enter  upon  a  post- 
armistice  campaign  of  profiteering.  That  led  to  an  epidemic 
of  strikes  for  advanced  wages  in  railway  and  steel  circles,  on 
the  ground  of  advancing  costs  of  living.  In  this  the  policy  of 
not  disposing  at  once  of  some  of  the  surplus  promptly  reaped 
its  own  sowings.  Had  that  been  done  prices  must  have  been 
kept  down  in  many  of  the  staples  of  which  there  w^as  no  sort 
of  doubt  as  to  the  army's  ever  needing  even  a  fraction  of  the 
stocks  piling  up  at  every  central  storage  point.  Especially 
culpable,  from  the  consumers'  standpoint,  was  the  agreement 
on  the  part  of  the  Acting  Quartermaster  General  by  letter  of 
December  6,  a  month  after  the  armistice,  assuring  the  can- 
ners'  association  that  the  200,000,000  cans  of  vegetables  held 
in  the  government's  stock  would  not  be  marketed  during  the 
current  season.  Then,  or  soon  thereafter,  by  January  i,  75 
per  cent  of  the  pack  of  tomatoes  had  passed  into  the  whole- 
sale and  retail  trade  for  domestic  consumption.  It  was  these 
holdings  that  the  order  referred  to  was  designed  to  protect 

1  From  Letter  of  Secretary-  of  War,  to  Hon.  H.  D.  Flood,  Appendix  to  Minority 
Report,  H.  R.  No.  171,  dated  July  26,  19 19,  p.  15. 


296  GOVERNMENT   WAR    CONTRACTS 

against  any  depression  in  prices  that  might  occur  if  the  army's 
canned  food  surplus  had  been  marketed  progressively,  be- 
ginning at  once  after  the  armistice.  There  was  no  need  of 
breaking  the  market;  but  there  was  some  need,  as  the  federal 
Department  of  Justice  later  came  to  realize,  of  keeping  prices 
from  rising  by  marketing  some  of  the  known  surplus  stock. 
Public  agitation  later  compelled  the  abandonment  of  the 
policy  of  protecting  the  canners  and  the  canned  goods  trade 
at  the  expense  of  the  consuming  public;  although  the  Quarter- 
master General's  order  was  not  abrogated  until  May  23,  1919, 
when  the  sales  of  canned  vegetables  proceeded.  That  was 
six  months  after  the  armistice.  Evidently  the  War  Depart- 
ment had  kept  faith  with  the  producers  and  the  distributors.  ^ 
In  the  case  of  meats  the  policy  was  practically  the  same — of 
official  tenderheartedness  toward  the  price  controlling  factors 
in  the  market. 

Problem  of  Disposal  of  Quartermaster's  Surplus 

When  the  armistice  went  into  effect,  the  Quartermaster 
Department  had  outstanding  approximately  16,000  contracts, 
■involving  a  total  value  of  $1,800,000,000.  These  contracts 
may  be  divided  into  two  main  classes,  including  those  which 
the  armistice  rendered  no  longer  useful  for  the  purposes  of 
the  army,  and  those  covering  articles  needed.  Of  the  former 
it  was  of  course  desirable  in  the  public  interest  that  all  con- 
tracts which  could  be  canceled  should  be  stopped  at  once. 
Of  those  which  could  not  be  terminated  immediately  it  was 
most  desirable  that  they  be  tapered  down  gradually  or  at 
best  be  stopped  at  the  earliest  possible  date  consistent  with 
the  public  interest. 

It  is  a  fair  question  whether  or  not,  in  the  official  judgment, 
it  was  not  political  considerations  rather  than  the  general 
public  interest,  that  led  the  administration,  unwittingly  of 
course,  to  place  so  many  of  the  contracts  which  no  longer 

^  On  this  phase  of  the  delay  in  disposing  of  surplus  food  products,  see  both  the 
majority  and  the  minority  reports  of  the  Select  Committee  on  Expenditures  in 
the  War  Department,  Report  Xo.  171,  66th  Cong.,  ist  Sess.,  House  of  Repre- 
sentatives, W.  J.  Graham,  chairman,  July  28,  1919. 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT  297 

served  the  public  interest  in  the  category  of  those,  "the  im- 
mediate cancelation  of  which  would  have  disrupted  the  in- 
dustry, doing  material  damage  to  the  contractor,  to  the 
farmer  and  to  labor."  The  tapering-off  policy  was  adopted 
in  the  case  of  some  of  the  service  rifle  contracts  for  which,  of 
course,  there  was  no  need  now  that  the  army  was  to  be  reduced 
to  a  peace  footing  as  soon  as  practicable.  In  the  General 
Staff's  authorization  of  the  declaration  of  a  surplus  of  perish- 
able food  products,  as  of  November  30,  an  army  of  500,000 
was  made  the  basis  of  the  estimates  of  the  amounts  to  be 
withheld  out  of  total  stocks,  in  arriving  at  the  quantities  to 
be  assigned  to  surplus. 

The  first  step  in  working  out  the  problem  applied  only  to 
perishable  foodstuffs  and  was  practically  the  initial  acknowl- 
edgment on  the  part  of  the  military  authorities  as  to  its 
purpose  in  handling  this  biggest  of  all  single  economic  ques- 
tions arising  out  of  the  war.  This  came  nineteen  days  after 
the  armistice.  On  the  following  day  the  Secretary  of  War 
announced  that  in  the  disposal  of  the  army  surplus  the  follow- 
ing three  principles  would  be  followed : 

1.  The  disposal  of  supplies,  as  far  as  possible,  through  other  government 
agencies  and  relief  commissions. 

2.  To  take  up  with  the  original  producer  who  furnished  the  articles  to  the  gov- 
ernment the  question  of  repurchase,  in  order  that  materials  might  be  distributed 
through  their  original  and  customary  channels. 

3.  To  offer  the  remaining  surplus  in  the  best  market  or  to  the  public  at  large 
with  full  publicity. 

When  the  War  Department  turned  salesman  it  apparently 
felt  some  diffidence  about  sailing  far  from  shore.  Its  policy 
of  dickering  with  the  producer,  after  having  paid  him  a  profit 
for  his  goods  as  purchaser,  and  before  venturing  to  offer  the 
surplus  to  the  consuming  public,  was  characteristic  of  its 
great  tenderness  for  the  interests  with  which  it  had  fixed 
prices.  The  plea  that  these  prices  were  fixed  by  the  govern- 
ment and  should  therefore  be  "protected"  in  the  formulation 
of  any  sales  policy  for  the  disposable  surplus,  is  based  on  the 
false  assumption  that  that  fixed  price  did  not  take  into  account 
the  risks  of  an  end  of  the  war.     That  canners  of  foodstuffs 


298  GOVERNMENT   WAR   CONTRACTS 

did  not  get  a  fair  price  from  the  government  as  purchaser 
would  indeed  be  hard  to  maintain  before  an  average  American 
jury.  The  government's  holding  canned  goods  out  for  five 
months  after  the  armistice  was  therefore  simply  an  additional 
premium  put  on  these  ,  goods  which  the  trade  or  packers 
held — a  price  booster  in  a  scarcity  market. 

There  is  only  one  mitigating  factor  to  offset  this  otherwise 
unsound  economic  policy  of  delay  in  liquidating  surplus 
perishables  more  promptly  but  gradually.  It  lay  in  the  con- 
ditions which  made  delay  in  taking  a  dependable  inventory 
unavoidable.  The  vast  mechanism  that  was  turning  out 
products  of  tens  of  thousands  of  different  kinds  could  not  be 
brought  to  a  stop  at  once.  Only  gradually  could  a  standstill 
be  reached,  in  order  that  a  start  might  be  made  in  the  up- 
building of  a  piece  of  machinery  by  which  just  the  reverse  of 
supply  might  be  begun.  Until  that  were  done  the  policy  of 
disposal  might  be  declared,  but  the  problem  itself  could 
hardly  be  attacked,  of  taking  an  inventory  that  was  worth 
while.  So  long  as  streams  of  traffic,  much  of  which  had  been 
congested  or  delayed  along  the  railway  lines,  were  pouring 
into  the  storage  centers  or  arriving  at  the  seaboard  on  the 
prearmistice  schedules,  little  in  the  way  of  an  accurate  inven- 
tory could  be  arrived  at.  Consequently  it  was  decided  to 
disregard  the  usual  inventory  required  by  army  regula- 
tions and  prepare  a  special  organization  to  take  it  as  of 
December  31. 

Quartermaster  Corps'  Inventory  as  of  December  31, 

1918 

The  inventory  of  December  31  was  in  its  essential  respects 
a  remarkable  piece  of  administrative  work  in  government 
hands.  It  partook  of  that  high  regard  for  systematic  record 
for  which  the  Purchase,  Storage  and  Traffic  Division  of 
the  General  Staff  w^as  coming  to  be  known.  Its  director 
called,  as  early  as  December  i,  a  group  of  178  officers  to 
Washington  for  instruction  on  the  methods  of  this  inventory. 
After  sixteen  days  of  training,  these  were  sent  to  the  various 


LIQUIDATION,   CANCELATION  AND   ADJUSTMENT  299 

supply  offices  and  camps,  where  an  officer  designated  by  each 
commanding  officer  of  the  post  or  station  was  assigned  to  this 
particular  duty.  These  officers  were  in  turn  assembled  in  the 
supply  office  of  each  zone  for  specific  instructions  as  sent  from 
Washington.  Colonel  Norris  Stayton  of  the  Quartermaster 
Corps,  Assistant  Director  of  Storage,  thus  describes  the  scope 
and  results  of  this  inventory : 

On  December  31  this  inventory  started  throughout  the  United  States.  The 
physical  count  was  completed  in  ten  days  at  all  posts,  station  and  depots.  These 
reports  were  then  brought  to  Washington  and  consolidated.  When  it  is  consid- 
ered that  this  vast  quantity  of  purchase  and  storage  supplies  were  scattered 
throughout  the  country  in  sixteen  zone  supply  depots,  three  army  reserve  depots, 
four  large  port  terminals  and  from  two  hundred  to  three  hundred  posts,  it  is 
obvious  that  the  task  of  determining  the  amount  and  location  of  these  supplies 
was  a  problem  in  itself.  To  illustrate,  there  were  some  180,000  different  items  to 
be  counted,  reported  and  consolidated.  To  do  this,  it  took  approximately  10,000 
people  to  complete  this  work.  Inventory  was  completed  on  April  30  and  a  list 
prepared  for  the  use  of  declaring  surpluses. 

Here  we  have  at  last  the  scientific  basis  for  a  definite  plan 
or  method  of  getting  tangible  results  in  surplus  disposal. 
The  division  between  retained  stock  and  surplus,  on  the  pro- 
visional basis  of  an  army  of  500,000,  was  by  this  time  more 
easily  arrived  at,  because  both  of  the  rapid  demobilization 
and  of  the  indisposition  of  Congress  to  favor  more  than 
350,000  men  for  a  peace  time  army.  Consequently  the  half 
million  basis  was  a  safe  criterion.  On  this  matter  the  army 
authorities  could,  however,  take  no  chances,  as  to  the  needs  of 
the  forces  undergoing  demobilization.  That  was  likewise 
influenced  by  the  precaution  of  not  returning  the  soldiers  too 
rapidly  to  civil  life  on  account  of  the  difficulty  of  finding 
occupations  for  them  along  with  the  adjustment  of  workers 
from  war  time  to  peace  time  work.  It  thus  came  about  that 
out  of  an  army  of  3,700,000  men  on  November  11,  2,000,000 
of  which  were  in  France  and  1,700,000  in  continental  America, 
fully  800,000  men  w^ere  discharged  by  January  11,  1919. 
By  May  24,  a  total  of  2,252,000  men  were  out  of  the  service, 
and  releases  were  being  effected  at  the  rate  of  80,000  weekly. 
Probably  half  of  the  numerical  total  of  the  army  at  its  largest 
shared  in  the  order  making  canned  vegetables  part  of  the 


300  GOVERNMENT    WAR   CONTRACTS 

soldier's  rations  after  March  17,  thereby  reducing  still  further 
the  total  available  for  surplus  disposal. 

Dismantling  of  the  war  time  military  organization  came  in 
for  its  share  in  causing  delay  in  surplus  declarations  on  the 
inventoried  basis.  Although  the  fighting  stopped  November 
II,  and  the  declaring  of  a  surplus  was  authorized  November 
30,  and  ascertained  December  31-January  9,  the  first  sur- 
pluses were  made  and  sales  effected  on  February  12,  1919; 
but  that  of  meats  was  not  made  before  March  26.  Begin- 
ning with  May  numerous  surpluses  were  declared  and  sales 
were  being  consummated  on  a  large  scale  as  early  as  June 
and  July  when  (July  29)  the  Secretary  of  War  by  House 
resolution  was  requested  to  place  surplus  food  products  on  the 
market  without  further  delay,  alleging  that  much  deteriora- 
tion and  loss  had  resulted  from  official  tardiness.  This  latter 
statement  is  not  borne  out  by  the  information  available, 
except  as  to  a  lot  of  hams  awaiting  overseas  shipment  at  Nor- 
folk. The  intention  of  the  authorities  was  to  market  much 
of  the  vegetable  and  meat  canned  goods  in  Europe  or  else- 
where abroad,  as  they  had  been  packed  in  larger  sized  cans 
for  transit  abroad  and  were  less  salable  here  on  that  account. 
For  the  purpose  of  selling  the  surplus,  the  War  Department, 
under  its  Division  of  Supply,  Storage  and  Traffic,  organized 
a  sales  division,  in  charge  of  which  a  director  of  sales  was 
placed,  in  January,  1919. 

Custody  of  Surplus  Pending  Disposal 

The  vast  amount  of  munitions  and  supplies  on  hand  at  the 
end  of  the  war  imposed  upon  the  army  authorities  one  of  its 
most  difficult  problems  of  property  administration.  The 
task  was  rendered  all  the  more  difficult  because  of  the  rapid 
demobilization  and  the  lack  of  adequate  storage,  labor  and 
supervision  for  much  of  the  property  located  at  different  camps 
of  concentration  and  other  construction  projects  rendered 
unnecessary  by  the  end  of  the  war.  Camp  Holabird,  near 
Baltimore  and  the  town  of  Nitro,  West  Virginia,  were  notorious 
instances  of  inadequate  protection  if  not  grossly  culpable  neg- 
lect of  property  in  the  custody  of  the  military  establishment. 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  3OI 

Under  war  department  regulations  these  supplies  remained 
in  the  custody  of  the  commissioned  officers,  whose  duty  it  is 
to  assume  and  retain  property  accountability.  The  sum 
total  of  such  property  is  in  due  time  divisible  into  three  parts: 

(a)  Supplies  needed  by  the  army. 

(b)  Reserve  stocks  or  property  transferable  to  the  other 
government  departments  (auto  trucks  to  Department  of 
Agriculture). 

(c)  Surplus  supplies  to  be  sold  and  for  that  purpose  turned 
over  to  the  Sales  Director  of  the  Division  of  Purchase,  Storage 
and  Traffic,  to  negotiate  sales. 

Until  such  division  into  disposable  and  nondisposable  prop- 
erty is  made  no  steps  can  be  taken  looking  to  the  liquidation 
of  army  assets;  and  until  such  sales  are  made  the  regular 
commissioned  officers  are  responsible  for  the  condition, 
protection  and  preservation  of  the  public  properties  in  their 
charge. 

The  volume  of  disposable  surplus  thus  turned  over  to  the 
Sales  Director,  actually  or  prospectively,  made  of  that  task 
one  of  the  largest  mercantile  transactions  ever  engaged  in  by 
the  army  authorities.  It  was  estimated  by  Senator  James 
W.  Wadsworth,  chairman  of  the  Senate  Military  Affairs 
Committee,  that  there  were  in  the  form  of  unsettled  contracts, 
including  such  properties  as  machinery,  raw  materials,  food- 
stuffs and  manufactured  products  as  of  July  31,  191 9,  assets 
disposable  to  the  value  of  $2,000,000,000,  for  the  proper  han- 
dling of  which  the  greater  part  of  8,000  emergency  officers  was 
needed.  Even  those  now  or  then  in  charge  of  these  stores 
and  stocks  were  not  given  anything  like  an  adequate  labor 
force  by  which  to  afford  ordinary  protection  against  exposure 
of  property  in  their  custody.  At  some  camps  of  concentra- 
tion hundreds  of  automobiles  were  left  exposed  for  months  in 
the  open  without  any  apparent  effort  to  conserve  these 
valuable  vehicles.  Individual  requests  for  information  as  to 
how  to  proceed  to  purchase  were  lost  somewhere  in  the  morass 
of  impotence  with  which  the  administrative  arm  of  service 
seemed  to  be  smitten  in  the  reaction  following  the  arrival 
of  peace. 


302  GOVERNMENT    WAR   CONTRACTS 

Among  the  explanations  assigned  for  this  indisposition  to 
liquidate  property  no  longer  needed  by  the  army  but  desired 
by  the  public,  were  the  following: 

1.  Until  peace  was  actually  assured  by  the  signing  of  the 
Treaty  of  Versailles  by  Germany,  June  28,  1919,  over  seven 
months  after  war  ceased,  it  was  not  deemed  best  to  deplete 
the  foodstuffs  and  other  supplies. 

2.  Therefore,  no  division  of  supplies  into  needed  reserves 
and  surplus  stocks  could  be  made,  by  which  to  effect  liquida- 
tion on  a  comprehensive  scale. 

3.  Until  the  size  of  the  permanent  personnel  of  the  military 
establishment  was  determined,  provisionally  at  least,  the 
quantity  of  the  supplies  to  be  held  back  was  problematical. 

4.  The  disposition  of  the  War  Department  (a)  to  avoid 
any  disposal  of  surplus  stocks  which  might  tend  to  demoralize 
market  conditions  at  home,  and  (b)  to  dispose  of  such  surplus 
as  was  originally  packed  and  intended  for  export  so  far  as 
practicable  to  foreign  markets. 

Although  some  of  these  reasons  were  specious,  that  was 
not  true  of  all  of  them.  Demobilization  itself  interfered  with 
supply  liquidations;  so  also  did  wholesale  resignations,  num- 
bering up  to  1,500  vacancies  by  the  end  of  the  fiscal  year  after 
the  armistice.  These  losses  had  crippled  the  regular  army 
officer  personnel  to  such  an  extent  that  the  adjustment  board 
service  and  the  vacancies  combined  took  from  the  regular 
army  official  list  about  19  per  cent  of  the  legalized  personnel. 

A  still  darker  side  of  the  liquidation  appears  in  the  wasteful 
abandonment  of  equipment  and  transport  facilities.  Prob- 
ably the  climax  of  military  irresponsibility  was  reached  in 
the  hundreds  of  cases  of  neglect  of  public  property  in  the 
period  of  a  year  or  more  following  the  armistice.  It  was  as  if 
a  paralysis  of  the  sense  of  custodial  duty  had  fallen  on  the 
War  Department.  At  many  a  camp  and  cantonment  this 
impotence  found  illustration  in  various  portions  of  the  coun- 
try. Yet,  numerous  as  these  instances  were,  they  did  not 
occur  without  some  protest  against  their  being  allowed  to 
persist  as  demoralizing  examples  of  governmental  negligence. 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT  303 

A  few  examples  at  home  and  abroad  will  suffice  to  prove  the 
facts. 

Some  of  the  most  flagrant  cases  of  failure  to  take  care  of 
army  property  might  be  cited  both  in  the  United  States  and 
in  France  with  the  Expeditionary  Forces.  At  Nitro,  West 
Virginia,  52,000  bales  of  cotton,  unloaded  in  August,  1918, 
were  still  rotting  in  exposure  to  rain  and  sun  over  a  year 
later  in  September,  1919.  At  Camp  Jesup,  Atlanta,  Georgia, 
several  thousands  of  automobiles,  trucks  and  motor  cycles 
were  left  exposed  as  part  of  the  many  millions  of  public 
property  wasting  on  this  spot.  In  the  meantime  the  various 
departments  of  the  federal  government  had  spent  $175,000 
for  the  same  kinds  of  vehicles  which  had  deteriorated  to  the 
point  of  junk  in  the  camps  in  Georgia  and  elsewhere.  Prob- 
ably the  most  inexcusable  case  of  abandonment  of  the  official 
regard  for  custody  of  property  was  near  Baltimore,  Mary- 
land. In  September,  1919,  11,000  army  cars  were  still  stored 
there,  many  exposed  without  ever  being  even  uncrated.' 
Of  the  latter  there  were  over  3,000  pleasure  cars  and  trucks. 
Nine  months  after  the  armistice,  1,000  cars  had  been  added,  and 
less  than  a  hundred  sold  as  wrecks  and  extra  parts.  There 
has  never  been  any  satisfactory  explanation  of  this  utter 
disregard  of  custodial  responsibility,  and  nobody  has  been 
brought  to  account  for  its  perpetuation.  Inadequate  labor 
at  this  locality  does  not  excuse  superiors  in  authority. 
The  only  excuse  ever  given  was  that  somebody  in  control 
was  under  orders  not  to  put  these  cars  on  the  market  at 
the  time. 

These  instances  suffice  for  conditions  at  home.  Abroad 
there  was  ample  evidence  of  destruction  of  valuable  govern- 
ment property  in  the  breaking  up  of  the  organization  in 
France.  Members  of  Company  L,  23d  Engineers,  saw  for  a 
period  of  from  two  weeks  to  a  month  continuous  burning  of 
military  equipment  and  supplies  at  a  salvage  dump,  where  the 
79th  Division  was  located,  near  Souilly,  France.  This  in- 
cluded shoes,  jerkins   (wool  lined  jackets),  rifle  and  pistol 

^  New  York  Times,  September  4,  1919. 


304  GOVERNMENT   WAR   CONTRACTS 

leather  holsters,  ammunition  and  ammunition  boxes  and 
large  quantities  of  hay  apparently  in  good  condition.  Others 
had  seen  the  same  destruction  of  public  property,  and  four  or 
five  privates,  outraged  by  the  criminal  waste,  had  reported  to 
their  superiors,  whereupon  the  burning  of  new  and  used 
goods,  which  the  salvage  officer  was  apparently  unwilling  to 
assort,  was  brought  to  an  end  for  the  time  being  at  least. 
There  wagon  loads  in  long  line  came  and  emptied  their  con- 
tents on  a  fire  to  consume  blankets  and  clothing  and  what 
not,  including  good  overcoats,  for  days  and  weeks  during 
the  late  winter  and  spring  of  1919.^ 

^War  Expenditures  Hearings,  Ser.  IV,  part  I,  pp.  3-18,  including  testimony 
of  Sergt.  C.  B.  Malcolm,  and  four  privates  of  the  23d  Engineers,  Company  L. 


CHAPTER  II 

Cancelations  of  Orders  and  Contracts 

War  contracts  usually,  but  not  always,  contain  clauses 
providing  for  cancelation  on  given  conditions.  In  some 
forms  this  appears  as  a  right  to  terminate  the  contract  for 
neglect,  refusal  or  failure  on  the  contractor's  part  to  prosecute 
with  promptness  and  diligence,  for  default  in  performance  of 
agreement,  or  "if  conditions  arise  which  in  the  opinion  of  the 
contracting  officer  make  it  advisable  or  necessary  to  cease 
work."  This  gives  two  distinct  grounds  for  cancelation: 
one  is  based  on  delinquency  of  the  contractor,  and  the  other 
on  the  right  of  the  government  to  take  such  action  as  may 
protect  its  own  interests  under  unforeseen  contingencies. 
The  cancelations  arising  from  the  ending  of  the  war  come 
under  the  latter  class.  Under  the  former  class  of  causes  for 
cancelation  came  all  that  group  of  contracts  that  required 
emergency  speed,  such  as  were  made  for  the  construction  of 
the  camps  and  cantonment  buildings.  In  these  cases  the  de- 
posed contractor  for  delinquency  was  to  be  dispossessed  at 
five  days'  notice  and  the  contracting  officer  to  be  given  posses- 
sion of  the  premises  for  the  purpose  of  completing  the  work.  ^ 
In  case  of  cancelation  for  the  purpose  of  abandoning  the  work 
and  terminating  the  contract, ^  the  standard  form  provided 
that— 

The  contracting  officer  shall  assume  and  become  liable  for  all  such  obligations, 
commitments  and  unliquidated  claims  as  the  contractor  may  have  theretofore,  in 
good  faith,  undertaken  or  incurred  in  connection  with  said  work.  .  .  .  The 
contracting  officer  shall  pay  to  the  contractor  such  an  amount  of  money  on  account 
of  the  unpaid  balance  of  the  cost  of  the  work  and  of  the  fee  as  will  result  in  the 
contractor  receiving  full  reimbursement  for  the  cost  of  the  work  up  to  the  time  of 
such  abandonment,  plus  a  fee  to  be  computed  in  the  following  manner:  To  the  cost 
of  the  work  up  to  the  time  of  such  abandonment  shall  be  added  the  amount  of  the 

1  Contract  for  Emergency  Work,  Q.  M.  G.  O.,  3rd  ed.,  Art.  VII:  "Right  to 
Terminate  Contract." 

'-Ibid.,  Art.  Vni. 

305 


306  GOVERNMENT   WAR    CONTRACTS 

contractual  obligations  or  commitments  assumed  by  the  contracting  officer,  and 
such  total  shall  be  treated  as  the  cost  of  the  work  upon  which  the  fee  shall  be 
computed. 

Settlement  for  Cost-Plus  Fixed  Profit  Contracts 

This  was  the  procedure  In  the  cost  plus  percentage  contracts, 
but  it  did  not  vary  materially  in  method  of  settlement  from 
the  terms  and  procedure  in  other  cases  of  termination  in  the 
public  interest.  An  Ordnance  Ofhce  contract  with  the  Otis 
Elevator  Company  for  1,039  recuperators  for  240  howitzers, 
entered  into  as  early  as  December  22,  191 7,  and  expiring 
November  15,  191 8,  apparently  contemplated  the  contin- 
gency of  the  war's  end  or  other  eventualities.  Article  IX,  of 
that  agreement,  covers  elaborately  just  this  contingency  in 
the  following  terms : 

Article  IX.  In  the  event  that  in  the  opinion  of  the  Chief  of  Ordnance  the 
public  interests  so  require,  this  contract  may  be  terminated  by  notice  in  writing  to 
the  contractor,  without  prejudice  to  any  claim  the  United  States  may  have  against 
the  contractor. 

In  the  event  of  the  termination  of  this  contract  as  aforesaid  the  United  States 
shall  pay  the  contractor  all  costs  and  obligations  of  the  contractor  theretofore  in- 
curred and  not  previously  paid,  which  may  be  allowed  pursuant  to  Article  V  hereof 
[allowance  of  costs],  together  with  the  fixed  profit  herein  provided  upon  all  articles 
previously  delivered  and  accepted.^ 

This  was  one  of  those  numerous  Ordnance  contracts  of  a 
highly  technical  character  in  whose  production  many  of  the 
larger  and  most  responsible  manufacturing  concerns  of  the 
country  were  engaged  when  the  close  of  hostilities  came.  The 
contractual  provisions  under  which  the  cancelation  and  settle- 
ment took  place  w^ere  of  this  general  character  authorizing 
the  government  to  stop  production.  In  this  particular 
award  the  contractor  w^as  to  receive  a  profit  of  $1,250  per  unit 
delivered,  making  the  total  compensation  $1,298,640  as  a 
fixed  profit  on  a  cost-plus  contract.  That  compensation  was, 
of  course,  entirely  apart  from  the  costs  or  reimbursements  for 
elements  of  expense  entering  into  the  production  of  these 
units.     These  allowances  for  costs  were  fully  indicated  in  the 

1  War  Expenditures  Hearings,  Ser.  VI,  part  37,  p.  2066. 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT  307 

chapter  on  Analysis  of  Standard  Ordnance  Contracts,  based 
largely  on  "definition  of  costs  pertaining  to  contracts,"  as 
established  in  Ordnance  Office  practice.^ 

These  quotations  from  actual  contracts  of  representative 
character  will  serve  to  show  by  what  authority  and  forms  the 
government  anticipated  cancelations  and  provided  for  settle- 
ment of  accounts.  The  particular  procedure  in  such  adjust- 
ments forms  a  part  of  the  administrative  work  of  the  main 
supply  service  of  the  General  Staff.  That  is  probably  best 
elaborated  in  the  practice  of  the  Purchase,  Storage  and  Traffic 
Division  of  the  War  Department,  as  found  in  the  official 
Supply  Circular,  No.  iii,  issued  November  9,  191 8,  or  two 
days  before  the  armistice.  This  statement  of  procedure  had 
so  much  to  do  with  the  extensive  work  of  winding  up  war 
contracts  under  the  War  Department  auspices  as  to  make  it 
advisable  to  reproduce  its  main  features  herewith. 

Termination  of  Contracts  and  Orders  in  Public 

Interest 

The  position  of  the  government  in  the  termination  of  con- 
tract work  is  based  on  the  assumption  that  the  production  of 
an  article  or  the  rendering  of  a  service  for  which  there  is  no 
further  need  justifies  termination,  with  proper  and  fair 
compensation  within  the  provisions  of  the  contract.  Where 
there  is  no  such  provision  for  stopping  work  by  prior  agree- 
ment, the  discretion  of  the  appropriate  officer  of  the  govern- 
ment is  relied  upon  to  exercise  that  authority  in  the  public 
interest.  This  authority  in  that  case  is  not  exercised  in  the 
form  of  a  notice  of  cancelation  but  of  a  request  to  suspend 
work  in  the  public  interest.  That  is,  the  government  pro- 
ceeds on  the  assumption  not  of  having  a  right  by  contract 
agreement  to  stop  work  but  requests  the  contractor  to  sus- 
pend as  a  matter  of  duty  to  the  common  weal.  That  is  the 
ground  of  action,  although  the  contractor  does  not  always 
recognize  his  right  to  proceed,  in  the  absence  of  an  express 
terminating  clause,  in  some  cases  for  a  period  of  fifteen  days 

J  Definition  of  "Costs,"  Office  of  Chief  of  Ordnance,  Form  2941, 
21 


308  GOVERNMENT   WAR   CONTRACTS 

as  in  the  so-called  tapering-off  arrangements  for  suspension  of 
war  work.  On  the  other  hand,  few  contractors  care  to  run 
the  risk  of  continuing  to  incur  costs  of  production  after  receiv- 
ing a  request  to  suspend  owing  to  the  ending  of  the  war. 

Supply  Circular,  No.  1 1 1 ,  contains  the  following  principal 
provisions  governing  this  important  phase  of  war  contract 
liquidation,  by  which  the  various  officers  were  to  be  guided 
on  this  subject: 

1.  Whenever  the  appropriate  officers  of  the  government  determine  that  it  is 
necessary  in  the  public  interest,  to  terminate,  in  whole  or  in  part,  a  contract  or  a 
purchase  or  procurement  order  for  materials  or  supplies,  such  termination  shall  be 
effected  as  herein  directed. 

2.  Whenever  such  contract  or  order  expressly  provided  that  it  may  be  termi- 
nated in  the  public  interest,  termination  may  be  effected  only  in  accordance  with 
such  provisions,  unless  it  shall  be  in  the  public  interest  to  terminate  it  in  accordance 
with  the  provisions  of  this  circular  and  the  parties  shall  agree  thereto. 

3.  Whenever  such  contract  does  not  expressly  provide  that  it  may  be  terminated 
in  the  public  interest,  the  contractor,  if  the  public  interest  so  requires,  shall  be 
requested  to  suspend  work  thereunder,  in  whole  or  in  part  and  to  supply  promptly 
a  report  under  oath,  showing  in  detail  the  following  information  in  so  far  as 
applicable: 

(i)  Raw  materials  on  hand:  Cost  plus  inward  handling  charges  plus  such  por- 
tion of  overhead  as  is  directly  applicable. 

(2)  Partly  finished  products  on  hand:  Cost  of  raw  material  and  labor,  plus  such 
portion  of  overhead  as  is  directly  applicable. 

(3)  Finished  products  on  hand:  Contract  price,  less  freight  charges  if  the  con- 
tract or  offer  specifies  delivery  at  point  other  than  factory. 

(4)  Special  facilities:  Cost  of  facilities  specially  provided  and  paid  for  by  the 
contractor  for  the  performance  of  the  contract,  the  necessity  of  which  was  con- 
templated at  the  time  the  bargain  was  made  and  the  cost  of  which  was  included  in 
the  contractor's  original  estimate.  From  the  cost  of  such  facilities  deduct  their 
fair  value  at  the  time  the  contract  or  order  is  terminated  and  state  such  portion  of 
the  remainder  as  is  represented  by  the  ratio  of  the  uncompleted  portion  to  the 
whole  contract  or  order. 

(5)  Commitments:  The  contractor's  commitments  to  suppliers,  subcontractors 
and  others  for  contributing  materials  or  work.  If  the  contractor  claims  addi- 
tional compensation  by  reason  of  any  other  item  or  items,  he  may  add  such  item  or 
items,  together  with  a  detailed  statement  of  the  facts  on  which  his  claim  is  based. 

Supplemental  Contracts  for  Settling  Claims 

In  these  extensive  adjustments  the  contracts  or  orders  ter- 
minable by  prior  agreement  are  readily  thrown  into  the  course 
of  settlement.  But  those  as  to  which  no  such  recourse  is  open 
j)resent  a  different  problem — a  problem  in  whose  solution  the 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  309 

tact  of  the  careful  bargainer  finds  field  for  play  of  negotiating 
powers.  To  begin  with,  the  noncancelable  contracts  are  not 
terminated  by  any  formal  notice  to  that  effect,  for  the  good 
reason  that  such  notice  would  bar  the  way  to  the  making  of 
the  supplementary  contract,  which  is  what  the  War  authori- 
ties are  after.  Hence,  only  a  request  to  suspend  is  issued,  not 
a  notice  of  cancelation.  Here  is  where  the  good  will  and  pub- 
lic spirit  of  the  contractor  comes  in  with  good  effect.  On  such 
a  basis  it  is  found  to  be  no  difficult  matter  to  arrive  at  an 
agreement  as  to  what  is  a  fair  and  reasonable  compensation 
to  be  paid  the  contractor  by  reason  of  suspension  or  termina- 
tion of  contract.  In  the  case  of  a  voluntary  agreement  the 
result  is  then  "embodied  in  a  supplemental  contract  which 
shall  set  forth  the  agreed  compensation  and  shall  provide  in 
specific  terms  that  it  constitutes  full  and  final  settlement  of 
all  questions  and  claims  growing  out  of  the  original  contract 
or  order."  This,  in  turn,  can  not  become  binding  until 
approved  by  the  Board  of  Contract  Review  of  the  particular 
supply  bureau  concerned.^  For  instances  in  which  the  con- 
tracting officer  and  the  contractor  fail  to  come  to  an  agree- 
ment the  Board  of  Contract  Adjustment  was  created  to  de- 
termine all  claims,  doubts,  and  disputes  which  may  arise 
under  departmental  contracts. - 

Summary  of  Features  in  Contract  Adjustment 

Governmental  relations  with  the  business  world  underwent 
rapid  changes  following  the  armistice.  There  was  pressure 
from  such  organizations  as  the  United  States  Chamber  of 
Commerce,  the  Illinois  Manufacturers'  Association  and  the 
New  York  Merchants'  Association,  for  as  prompt  a  release  of 
business  concerns  as  practicable.  It  was  especially  in  the  field 
of  munitions  production  that  large  amounts  of  capital  and 
labor  were  tied  up — awaiting  a  definite  policy  of  release  from 
the  government,  provided  always  that  settlement  on  fair  terms 
could  be  accomplished  on  mutually  satisfactory  bases.    Under 

1  For  functions  of  these  boards  see  Supply  Circulars,  Nos.  14  and  21,  Purchase 
and  Supply  Branch,  dated  respectively  July  30,  1918,  and  August  16,  1918. 

2  War  Department,  General  Orders,  No.  103,  November  6,  1918. 


310  GOVERNMENT   WAR   CONTRACTS 

the  supervision  of  Gen.  George  W.  Goethals,  then  Director  of 
Purchase,  Storage  and  Traffic,  and  of  Director  of  Munitions 
Benedict  Crowell  of  the  War  Department,  and  his  able  as- 
sistants, the  following  general  steps  of  procedure  were  taken: 

1 .  The  first  thing  done  after  the  armistice  was  to  remove  the 
priorities,  so  that  manufacturers  could  be  free  to  take  civil 
orders  with  the  least  practicable  loss  of  time  in  making  the 
transition  to  commercial  work. 

2.  Within  a  month  after  November  ii  practically  all  of  the 
25,000  contractors  had  been  notified  of  the  suspension  of  their 
contracts  and  of  the  purpose  of  the  government  to  expedite 
the  settlement  of  accounts  as  rapidly  as  possible  by  paying 
provisionally  at  least  75  per  cent  of  the  tentatively  agreed 
reimbursement,  leaving  the  other  quarter  for  subsequent 
determination  after  reexamination  and  review. 

3.  In  order  not  to  cause  too  sudden  a  transfer  of  labor  from 
the  munition  plants  and  other  industries,  especially  the  textile 
and  the  metal  industries,  an  abrupt  dislocation  of  employ- 
ment was  to  be  guarded  against  everywhere  by  continuing 
operations  of  contracts.  That  was  the  case  with  the  knit 
goods  industries  in  Connecticut  and  with  the  service  rifle 
manufactories,  as  well  as  in  some  other  war  supply  estab- 
lishments. The  Eddystone  Rifle  Works  tapered  off  until 
February. 

4.  For  that  large  class  of  cases  in  which  contractors  are  not 
bound  by  any  express  terms  to  accept  cancelation  in  the  public 
interest,  it  is  proposed  to  negotiate  a  supplementary  agreement 
to  take  the  place  of  the  original  contract  and  at  the  same  time 
embody  the  exact  terms  and  conditions  of  settlement  for  un- 
finished products.  This  was  subject  to  review  of  all  such 
claims  and  adjustments  by  the  Board  of  Contract  Review,  as 
negotiated  by  the  district  claims  boards. 

5.  The  discovery,  by  reason  of  the  decision  of  the  Comp- 
troller of  the  Treasury,  that  thousands  of  the  procurement 
orders,  especially  for  munitions,  were  not  in  the  form  of  con- 
tracts drawn  according  to  the  law,  made  advisable  some 
further  enabling  legislation  on  the  part  of  Congress.     These 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT  3 II 

informal  contraccs,  for  rifles  for  instance,  had  been  partly 
filled  and  deliveries  accepted,  to  which  extent  the  government 
was  bound  to  pay  on  the  quantum  meruit  principle.  But  for 
the  unfinished  work  or  that  in  process  the  Dent  Act  was 
passed  (approved  March  2,  1919),  legalizing  orders  for  which 
legal  contracts  had  not  been  issued  or  were  delayed. 

6.  The  setting  up  of  liquidating  machinery  for  the  presenta- 
tion of  contractors'  claims  in  standard  form,  for  their  consider- 
ation by  district  claims  boards  of  various  bureaus,  for  their 
review  by  central  boards  at  Washington  and  the  final  adju- 
dication of  contractual  questions  arising  out  of  the  war,  so  as 
to  forestall  as  far  as  practicable  appeals  to  the  slower  processes 
of  the  Court  of  Claims. 


CHAPTER   III 
Postarmistice  Methods  of  Adjusting  Contracts 

As  soon  as  the  cessation  of  hostilities  releases  the  economic 
activities  of  a  nation  from  the  main  business  of  military  effort, 
a  sort  of  universal  let-down  ensues.  The  relations  of  govern- 
ment to  private  interests  undergo  a  fundamental  change. 
In  war  time  the  spectre  of  commandeering  power  always  over- 
shadowed the  business  arrangements.  Now  that  spell  had 
been  broken.  The  relation  of  contractor  and  government 
shifted  to  a  legal-economic  basis  in  which  a  larger  measure  of 
bargaining  freedom  existed.  As  soon  as  the  armistice  of 
November  ii,  1918,  became  a  fact,  this  newer  status  gave  a 
different  character  to  the  war  contract  relationship.  For  this 
reason  an  entirely  different  kind  of  machinery  had  to  be 
called  into  use.  Out  of  an  era  in  which  speed  of  execution  of 
contract  commitments  was  the  essential  consideration,  tens 
of  thousands  of  business  concerns  suddenly  found  themselves 
in  a  realm  of  negotiation,  of  cost  accounting  and  of  claims,  in 
which  the  government  had  almost  over  night  set  up  a  specially 
contrived  mechanism  of  claims  boards  to  facilitate  liquidation 
of  its  obligations  without  resort  to  litigation. ^  Reconstruc- 
tion was  a  word  on  everybody's  tongue.  Not  only  how  but 
how  soon  might  we  expect  to  get  back  to  the  paths  of  free 
industry  again?  In  this  situation  the  question  of  the  meth- 
ods to  be  followed  by  which  assets  tied  up  in  governmental 
contracts  might  be  rendered  quickly  available  for  employ- 
ment in  commercial  enterprise  became  the  question  of  the 
hour. 

The  Civil  War  had  left  some  unfavorable  impressions  as  to 
contract  relations  with  the  government.  Some  cases  were 
still  trailing  their  almost  endless  lengths  through  the  courts. 

1  Hearings  before  Senate  Committee  on  Military  Affairs,  on  Hitchcock  Bill, 
Senate  5261,  p.  31,  January  7,  1919. 

312 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT  313 

Only  the  older  business  men  recalled  this  phase  of  experience 
in  this  field.  To  the  great  mass  of  contractors  the  situation 
was  unique.  Some  proposed  organizing  semi-civic  and  semi- 
official boards,  composed  equally  of  members  of  local  cham- 
bers of  commerce  and  of  governmental  representatives.  But 
these  commercial  interests  were  not  as  a  rule  enough  in  touch 
with  the  situation  to  be  clear  as  to  what  ought  to  be  done. 
The  government  alone  had  the  grasp  that  could  coordinate  the 
essential  elements  of  the  problem.  This  view  of  the  situation 
was  typically  expressed  in  a  trade  circular  issued  early  in 
1 91 9,  referring  to  the  new  problem  created  by  the  sudden 
termination  of  so  many  contracts: 

Commercial  contracts  are  never  breached  in  such  sudden  and  wholesale  fashion 
and  there  is  little  precedent  to  guide.  The  tedious  processes  of  litigation  must  be 
avoided.  Settlement  must  be  made  just  as  the  contracts  were  made — by  newly 
negotiated  settlement  agreements  fair  to  the  government  and  to  the  contractor. 
But  this  negotiation  can  not  proceed  with  the  freedom  of  private  business.  Much 
of  the  preliminary  work  in  the  field  must  be  accomplished  by  subordinates  without 
full  responsibility  and  authority.  Final  action  on  each  separate  negotiation  must 
be  had  in  Washington  by  responsible  officers  with  full  authority.  The  field  is  so 
vast  that  the  government  has  been  forced  to  set  up  a  complicated  mechanism  radiat- 
ing from  the  capital.' 

Administrative  Facilities  for  Claims  and  Contracts 

What  appeared,  when  the  contractual  situation  was  looked 
at  as  a  whole,  to  be  one  vast  problem,  really  when  viewed 
more  closely  fell  into  several  distinct  problems.  Some  con- 
tracts were  only  reduced,  others  suspended  and  still  others 
canceled  outright.  Then  there  was  an  entirely  different 
cleavage  into  formal  and  informal  contracts.  Another  classi- 
fication was  that  of  procurement  orders,  compulsory  or  vol- 
untary, and  contract  agreements.  Informal  contracts  were 
those  as  to  which  relief  was  sought  and  obtained  by  the  pas- 
sage of  the  act  of  March  2,  191 9.  These  applied  to  agree- 
ments with  contractors  for  war  purposes  as  to  which  no  prop- 
erly executed  contract  documents  could  be  found  or  were 
never  executed  as  intended.  The  hurry  of  war  was  made  the 
scapegoat  in  this  case.     It  thus  came  about  that  the  War 

1  Federal  Liquidating  Association,  Inc.,  Washington,  D.  C,  p.  I. 


314  GOVERXMEXT    WAR    COXTRACTS 

Department,  in  which  by  far  the  larger  part  of  these  questions 
arose,  developed  both  general  and  special  administrative 
machinery  for  the  purpose  of  facilitating  settlement.  Of  these 
there  were  four : 

I.  The  Board  of  Contract  Adjustment 

This  board  was  constituted  in  the  great  supply  agency  of 
the  War  Department,  the  Purchase  Division,  composed  of 
three  commissioned  officers  of  the  United  States  Army,  and 
charged  with  the  duty  "to  hear  and  determine  all  claims, 
disputes  or  doubts,  including  all  questions  of  performance  or 
nonperformance,  which  may  arise  under  any  contract  made 
by  the  War  Department,"  and  which  had  not  been  disposed 
of  by  mutual  agreement.  This  was  the  most  comprehensive 
board  of  contract  adjustment  and  was  essentially  a  court  of 
appeal.  1 

2.  The  War  Department  Claims  Board 

This  is  the  controlling  division  of  the  departmental  ma- 
chinery to  determine  what  procedure  shall  be  followed,  what 
division  of  duties  shall  prevail  and  how  claims  shall  be  divided 
among  the  different  bureau  claims  boards  or  other  special 
tribunal.  For  example,  the  claims  board  outlined  the  pro- 
cedure for  that  large  class  of  contracts  and  agreements  seek- 
ing relief  under  the  Dent  Act  of  March  2,  191 9,  relating  to 
the  so-called  invalid  contracts. 

3.  Bureau  Claims  Boards 

Each  of  the  so-called  bureaus  or  corps  (mistakenly  called 
departments)  into  which  the  work  of  the  War  Department  is 
divided  has  a  board  before  which  such  claims  come  as  may 
arise  out  of  the  agreements  which  said  bureau  has  made. 
There  is  thus  the  Ordnance  Claims  Board,  the  Signal  Service 
Claims  Board,  the  Engineers  Corps,  the  Construction  Divi- 
sion, the  Chemical  Warfare,  etc. 

1  Hearings  on  Hitchcock  Bill,  Senate  5261 :  Testimony  of  Joseph  H.  Defrees,  p. 
41,  January  7,  1919.  Also  testimony  of  Secretary  Baker,  pp.  31-36,  Lands  and 
Training  Fields. 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  315 

4.  District  Claims  Boards 

Each  of  the  departmental  bureaus  has  divided  the  country 
into  districts,  in  each  of  which  is  located  a  claims  board  to 
which  the  bureau's  claims  originating  within  that  district 
come  for  consideration,  investigation,  accounting,  etc.  The 
Ordnance  Corps  has  a  claims  board  in  its  district  office  at 
Philadelphia,  New  York,  Bridgeport,  Connecticut  and  Bos- 
ton, as  well  as  at  other  points  where  there  is  a  district  embrac- 
ing ordnance  contract  work  of  sufficient  importance  to  war- 
rant a  local  board.  To  these  district  boards  fell  by  far  the 
greater  part  of  the  actual  work  of  adjusting  the  contract 
relations  between  contractors  and  the  government.  The 
Purchase  Division  had  its  own  claims  board  in  the  same 
district,  as  had  any  other  departmental  bureau  with  contracts 
enough  to  make  it  worth  while. 

Excepting  the  Board  of  Contract  Adjustment,  all  of  these 
agencies  for  handling  claims  were  established  features  of  the 
War  Department  claims  organization  during  peace.  The 
prevailing  purpose  in  the  department's  policy  with  regard  to 
these  claims  and  contracts  was  to  negotiate  a  settlement 
wherever  possible.  But  where  such  efforts  at  mutual  agree- 
ment failed  the  way  was  left  open  for  the  contractor  upon 
petition,  to  have  the  Secretary  of  War  pass  upon  the  claim, 
or  his  duly  appointed  representative.  It  was  apparent  that 
the  secretary  himself  could  not  assume  any  such  responsibility 
in  person,  and  yet  it  was  realized  that  any  attempt  to  deputize 
his  duties  in  this  respect  must  carry  with  it  a  high  rank  of 
official  responsibility.  Otherwise  the  decisions  would  lack 
weight  and  force  commensurate  with  the  prestige  of  the 
department.  Consequently  the  Board  of  Contract  Adjust- 
ment is  the  duly  authorized  representative  of  the  Secretary 
of  War,  much  as  the  War  Department  Claims  Board  repre- 
sents the  department,  the  Bureau  Claims  Boards  the  bureaus 
of  the  department  and  the  District  Claims  Boards  the  respec- 
tive bureaus  in  the  districts. 


3l6  GOVERNMENT    WAR    CONTRACTS 

Features  of  District  Claims  Board  Hearings 

No  part  of  the  machinery  for  clearing  decks  of  pending 
contracts  was  better  adapted  to  its  purpose  than  the  district 
claims  boards.  The  plea  of  the  Secretary  of  War  for  the 
utilization  of  these  agencies  instead  of  setting  up  an  entirely 
new  set  of  district  agencies,  as  was  proposed  by  the  Hitchcock 
Bill,  in  Congressional  discussion  on  the  subject,  was  by  no 
means  misplaced.  The  personnel,  if  again  the  Philadelphia 
personnel  be  taken  as  typical,  proved  admirably  selected  to 
master  the  problem  and  effect  the  desired  results.  Some 
account  of  the  procedure  will  indicate  the  basis  of  confidence 
in  their  methods  and  conclusions  on  which  the  War  Depart- 
ment relied  for  disposing  of  the  bigger  end  of  the  task. 

At  these  hearings  the  subject  of  consideration  was  the  brief 
of  the  Claims  Staff  Branch  which  had  investigated  the  con- 
tractor's claim  in  its  several  aspects.  It  was  the  practice  to 
put  into  the  hands  of  the  members  a  copy  of  the  brief  three 
days  before  a  hearing  occurred,  so  that  each  member  of  the 
board  might  be  familiar  with  all  or  part  of  the  subject  which 
directly  concerned  him.  The  secretary  was  charged  with  the 
duty  of  maintaining  a  regular  schedule  of  dates  and  hours  of 
hearings,  and  it  was  made  his  express  duty  to  "notify  the 
ordnance  contractor  of  the  date  set  for  the  hearing  of  his  claim 
so  that  he  may  be  present  with  his  representatives  at  that 
time.  Such  hearing  may  be  of  an  informal  nature  in  which 
the  claim  is  freely  discussed  and  an  agreement  or  settlement 
made  which  is  found  satisfactory  to  both  the  ordnance  con- 
tractor and  the  claims  board." 

The  organization  of  the  claims  board  is  as  follows: 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT 


317 


SCHEDULE   OF   ORDNANCE   CLAIMS   BOARD   FUNCTIONS 

Philadelphia  District 


Legal  Adviser 
P.  F.  Rothermel 


Subcontract  Branch 
Capt.  J.  VV.  Johnson 
Capt.  S.  D.  Heed 
Maj.  Edw.  Wiener 


Claims  Board — 6  Members 
John  C.  Jones,  Chairman 
John  Dickey,  Jr. 
Maj.  F.  M.  Masters. 
Maj.  R.  W.  Appleby 
Capt.  Malcolm  F.  Ewen 
I.  H.  Francis,  Alt. 


Claims  Board  Secretary 
Alex.  H.  Carver 


Claims  Board  Branch 

P.  F.  Rothermel,  Ch. 
Wm.  M.  Davison,  Alt.  Ch. 
1st  Lt.  S.  S.  Parsons 
Capt.  R.  C.  Williams 
Capt.  C.  McC.  Mathias 
ist  Lt.  Melvin  S.  Lentz 
ist  Lt.  W.  T.  Sample 


Plant  Facilities  Branch 

I.  H.  Francis,  Ch. 
Capt.  F.  M.  Shepard 
H.  B.  Hackett 


Finance  Branch 

L.  N.  Shrigley 

Capt.  C.  McC.  Mathias 

Lieut.  P.  P.  Beards 


Contracting  Officer 
Capt.  Malcolm  F.  Ewen 


Liaison  Divisions 


Purchase,  Storage 
and  Traffic 


Traffic,  Storage  and 
Warehousing-Lt.  Lentz 


Salvage  Branch  Com. 

I.  H.  Francis 

Lt.-Col.  C.  F.  Hirshfeld 


Plant  Investig.  Branch 
Lt.-Col.  Hirshfeld,  Ch. 
Maj.  R.  A.  Green 
Wm.  Vollmer 
Maj.  F.  L.  M.  Masury 
Capt.  E.  J.  Snow 


Cost  Accounting  Branch 

Capt.  R.  H.  Johnson 

W^  S.  Hall 

R.  S.  Crook 

E.  J.  Comerak 

P.  S.  Booth 

G.  H.  Yeomans 


From  this  outline  it  can  be  seen  how  the  work  was  distrib- 
uted as  to  personnel,  what  duplication  in  functions  occurred 
in  the  division  of  duties,  and  to  what  extent  the  five  separate 
divisions  of  the  Claims  Board  Branch  were  manned  by  differ- 
ent persons.  The  distribution  of  the  civil  and  military  per- 
sonnel is  also  thus  shown. 

It  should  be  noted  that  probably  the  majority  of  the  mili- 
tary members   were   really   civilians   appointed   to   military 


3l8  GOVERNMENT   WAR   CONTRACTS 

duty.  The  contracting  officer,  of  course,  was  the  direct 
district  representative  of  the  Ordnance  Corps  at  Washington, 
speaking  for  the  government  on  the  contract. 

Philadelphia  District  Ordnance  Claims  Board 

It  is  the  function  of  the  Ordnance  Corps  of  the  United  States 
Army  to  procure,  purchase  or  manufacture  and  to  distribute 
the  necessary  ordnance  and  ordnance  stores  for  the  regular 
army  and  the  National  Guard,  as  well  as  the  national  army. 
This  includes  cannon,  artillery,  vehicles  and  equipment; 
apparatus  and  machinery,  small  arms,  ammunition,  accoutre- 
ments, etc.  Its  organization  on  a  strictly  military  basis 
prevailed  during  the  war  until  November  lo.  191 7,  after 
which,  in  February,  19 18,  reorganization  brought  into  its 
operations  ci\ilian  representatives  of  eminence  in  the  manu- 
facturing world.  The  highly  industrial  character  of  ordnance 
production  caused  the  Philadelphia  district  to  be  favored  with 
orders  and  contracts  to  a  larger  extent  than  any  other.  Its 
all-round  mechanical  equipment,  its  convenient  location  with 
regard  both  to  the  supply  of  raw  iron  and  steel  and  of  fuel 
for  manufacturing  purposes,  its  vast  population  of  mechanical 
talent,  and  its  facilities  for  domestic  and  for  foreign  trans- 
portation, together  with  its  extraordinary  variety  of  skilled 
industries — these  were  some  of  the  reasons  for  the  remarkable 
concentration  of  ordnance  orders  and  contracts  in  that  dis- 
trict. Upon  the  suspension  of  war,  the  volume  of  claims 
arising  was  enormous.  So  extensive  had  the  volume  of 
contract  commitments  in  that  district  become  as  to  awaken 
criticism  on  the  part  of  others  along  the  Atlantic  coast  and 
throughout  the  interior.  That  caused  the  War  Industries 
Board  to  limit  awards  to  establishments  already  operating, 
to  suspend  enlargements  and  to  allocate  contracts  to  interior 
points. 

At  the  claims  board  meetings  the  chairman  calls  for 
reports  on  cases  of  contracts  pending,  which  the  secretary  or 
the  legal  adviser  reads.  These  reports  contain  full  and  com- 
plete data  as  to  the  legal,  industrial,  commercial  and  financial 


LIQUIDATION,   CANCELATION   AND  ADJUSTMENT  3I9 

factors  involved.  The  feature  of  these  reports  was  that  they 
contain  every  essential  element  in  fact  or  law  that  was  likely 
to  have  any  bearing  on  adjustment  and  liquidation  of  the 
claim.  They  had  examined  the  contract  or  the  orders, 
reported  on  the  cancelation  status,  on  the  state  of  completion 
of  the  contract,  the  contractors'  total  claim  and  its  separate 
parts  item  by  item,  so  as  to  see  whether  any  unauthorized 
materials,  labor,  overhead  or  facilities  claims  entered.  In 
parallel  columns  the  items  of  claims  were  offset  by  what  in 
each  case  the  claim  staff  examiners  thought  or  found  to  be 
actually  allowable  and  what  items  were  rejected  in  toto,  and 
on  what  ground  in  each  case.  The  cost  accountant  or  exam- 
iner who  made  the  plant  examination  was  often  present  to 
report  in  detail  on  items  allowed,  reduced,  raised  or  rejected. 
On  such  a  basis  of  consideration  the  amount  of  claim  actually 
regarded  as  fair  and  just  was  arrived  at.  Then  the  contractor 
claimant  was  called  into  the  conference,  the  findings  of  the 
board  explained  and  the  justness  and  fairness  of  the  award 
emphasized  as  the  net  terms  of  settlement. 

The  net  amount  for  which  settlement  is  made  is  often  only 
about  10  per  cent  of  the  contract  claim.  If  the  contractor 
accepts  net  terms  or  any  other  definite  amount,  the  agree- 
ment to  that  effect  is  drawn  up,  signed  and  forwarded  to  the 
department's  Claims  Board  at  Washington.  That  board 
usually  accepts  what  the  district  board,  on  which  a  depart- 
mental bureau's  representative  sits,  recommends,  and  the 
contractor  has  agreed  to  accept.  Prompt  payment  follows 
thereafter. 

One  could  hardly  enjoy  the  privilege  of  attending  these 
hearings  without  feeling  that  the  clear  purpose  impelling  the 
machinery  of  liquidation  was  a  drive  for  settlement.  Where 
points  in  doubt  or  dispute  hung  fire,  the  case  was  often  laid 
aside  for  a  later  session,  in  order  to  have  the  particular  matter 
cleared  up.  This,  in  not  a  few  cases,  required  the  calling  of 
witnesses.  W'hen  witnesses  were  heard  the  producing  of  the 
witness  is  made  a  duty  of  the  claims  staff  branch,  through 
which  agency  practically  all  the  evidence  pertinent  to  the 
contract  has  come. 


320  GOVERNMENT   WAR   CONTRACTS 

To  summarize  the  features  of  evidence  before  the  claims 
board,  one  may  thus  group  the  material  features: 

1.  The  contractor's  claim  as  formulated  on  the  ten  or  more 
forms  prescribed  for  the  purpose  of  having  a  uniform  and 
comprehensive,  as  well  as  an  authoritative  statement  of  what 
the  claimant  regards  as  due  to  him  from  the  government  under 
the  conditions  of  the  contract. 

2.  The  brief  of  the  staff  claims  branch  in  which  the  results 
of  the  several  investigations  are  embodied  to  check  up  state- 
ments, verify  claims  and  revise  valuations,  etc.,  as  found  in 
the  claim.  The  conclusions  and  recommendations  summarize 
the  results,  indicating  what  the  net  claim  is  regarded  as 
amounting  to,  in  the  judgment  of  the  staff. 

3.  The  contract  itself,  or,  in  the  absence  of  any  written 
contract,  as  in  the  invalid  contract  cases  and  others,  the  rules, 
conditions  and  statutory  regulations  governing  contracting 
on  governmental  account  generally.  On  the  basis  of  these 
and  other  data  the  net  amount  of  compensation  is  arrived  at 
which  the  claims  board  approves  in  settlement. 

Workings  of  a  Typical  District  Claims  Board 

It  is  not  practicable  to  attempt  to  describe  the  workings  of 
more  than  one  of  the  local  district  claims  boards  in  the  settle- 
ment of  contract  claims.  Consequently  the  Philadelphia 
district  has  been  selected  as  representative,  both  for  volume 
of  orders  awarded  and  for  variety  of  products  used  for  war 
purposes,  including  ships.  And  among  the  different  bureaus 
of  the  War  Department  located  in  that  district,  the  Ord- 
nance Office  Claims  Board  is  probably  most  typical  of  the 
methods  followed  in  effecting  settlement  of  the  many  and 
enormous  contracts.  The  Ordnance  Office  has  some  eleven 
districts,  and  the  Quartermaster  General's  Office  eight,  in 
each  of  which  there  is  a  claims  board  at  work  on  their  re- 
spective bureau  claims.  These  boards  are  among  the  best 
equipped  branches  of  administrative  service  in  the  depart- 
ment. An  outline  of  the  Philadelphia  claims  board's  organi- 
zation will  indicate  in  a  general  way  the  features  of  main 
import. 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  32 1 

Organization  of  Philadelphia  District   Claims  Board  Branch 

{District  Ordnance  Office) 

The  claims  boards  operating  in  the  district  in  question  are 
primarily  adjustment  bodies.  They  were  organized  to  pass 
on  the  recommendations  of  the  investigation  and  account- 
ing staffs  into  the  merits  of  the  various  claims  of  the  prime 
contractors  and  subcontractors.  This  comprehensive  scope 
of  work  was  divided  into  two  main  branches  of  activities,  as 
follows : 

(i)  Claims  Board  Branch,  including  the  several  features 
of— 

(a)  Subcontract  branch. 

(b)  Plant  investigation  branch. 

(c)  Plant  facilities  branch. 

(d)  Finance  and  cost  accounting  branches. 

There  is  also  a  legal  adviser,  a  contracting  officer  and  the 
secretary  of  the  board,  in  the  personnel  of  the  organization, 
which  are  not  operating  as  separate  branches. 

(2)  Associated  functions,  among  which  are  included — 

(a)  Purchase,  storage  and  traffic. 

(b)  Traffic,  storage  and  warehousing. 

(c)  Salvage  board. 

In  the  official  description  of  operations  of  the  Ordnance 
District  Claims  Board  in  Philadelphia,  a  district  that  in  area 
covered  a  main  part  of  the  eastern  half  of  the  State  of  Penn- 
sylvania, its  procedure  is  thus  described : 

It  holds  stated  hearings  in  accordance  with  the  schedule  prepared  and  arranged 
by  the  secretary^  of  the  board;  adjusts  differences  between  the  government  and  the 
contractor  as  regards  the  claims,  and  makes  recommendations  as  well  as  authoriz- 
ing settlement  contracts  which  are  forwarded  to  the  Washington  Claims  Board 
for  approval.  On  receipt  of  the  approval  from  Washington  the  final  voucher  is 
issued,  closing  the  contract  between  the  government  and  the  contractor. 

For  the  efficient  and  smooth  running  of  the  district  board's 
operations  the  secretary  has  as  much  to  do  as  any  single 
official.  Within  the  district  he  is  the  medium  of  contact 
between  the  claims  board,  the  claims  staff  branch  and  the 
contractor.     He  takes  the  initial  step  in  all  action  pertaining 


322  GOVERNMENT    WAR    CONTRACTS 

to  a  claim  for  the  board  whether  in  receiving  or  disposing  of 
claims.  In  the  order  of  procedure  he  receives  notice  from  the 
office  of  the  Ordnance  district  chief  of  the  acceptances  of  sus- 
pension or  cancelation  of  orders  or  contracts.  Upon  the 
receipt  of  such  notice  he  supplies  the  contractor  with  the 
blanks  previously  prepared  for  this  purpose  (Finance  Forms 
I  to  lo),  together  with  instructions  for  the  making  out  of  his 
claim.  On  any  questions  which  arise  in  the  course  of  the 
preparation  of  this  claim,  the  secretary  is  the  adviser  of  the 
contractor  as  to  the  proper  method  to  proceed.  Thus  the 
important  procedure  of  settlement  of  the  army  contracts  of 
several  billions  of  dollars  in  value  as  they  stood  immediately 
following  the  armistice  was  inaugurated. 

But  the  secretary's  functions  run  through  a  much  wider 
range  of  activities.  Not  only  is  his  office  and  his  service  the 
point  of  contact  with  every  outside  interest,  but  every  in- 
ternal function  of  the  board  or  its  branches  is  included  in  the 
circuit  of  his  contact.  As  soon  as  the  claim  is  received  from 
the  contractor,  copies  (6  or  7)  are  given  a  docket  number,  two 
copies  going  to  the  board's  file  and  four  assigned  to  the  claims 
staff  branch,  of  which  there  are  four  divisions.  This  starts 
the  investigating  machinery,  which  looks  into  the  fourfold 
phases  of  the  contract  claim,  in  order  to  verify,  check  up  and 
report  as  a  unit  to  the  full  claims  board  on  the  merits  of  the 
claim.  In  this  part  of  the  work  the  technically  equipped 
claims  branch  has  probably  the  most  fundamental  duties 
in  the  whole  procedure.  Theirs  is  the  problem  of  determining 
the  facts  as  to — 

(a)  What  the  subcontractual  relations  of  the  contractor 
claimant  are,  what  pecuniary  obligations  are  involved,  as 
well  as  assisting  the  contractor  in  negotiating  settlements 
with  the  subcontractor.  This  is  the  work  of  the  subcontract 
branch. 

(b)  Plant  investigation  makes  inquiries  as  to  all  matters 
pertaining  to  physical  inventories,  delays  in  operations, 
changes  in  drawings,  counterclaims  and  similar  items,  report- 
ing in  detail  its  findings  to  the  claims  staff  branch. 


LIQUIDATION,   CANCELATION    AND   ADJUSTMENT  323 

In  the  experience  of  the  government  the  claims  for  delays  in 
furnishing  materials,  drawings  and  instructions  to  go  ahead, 
or  other  requisites  of  the  contract,  have  been  a  fruitful  source 
of  excessive  charges.  The  same  is  true  of  the  item  of  changes 
in  the  drawings,  of  which  the  airplane  production  was  a  fla- 
grant instance  of  vacillation  in  specifications.  The  govern- 
ment viewpoint  is  that  as  a  rule  these  changes  may  and  often 
do  reduce  rather  than  add  to  the  contractor's  expenses.  Yet 
they  are  usually  made  the  occasion  for  an  extra  bill  of  expenses 
on  public  account,  and  in  official  opinion  are  regarded,  it  may 
be  safely  asserted,  as  an  overworked  claim  for  which  the  plant 
investigator  should  always  be  on  the  guard. 

(c)  The  plant  facilities  branch  of  the  investigation  work 
covers  that  part  of  the  claimant's  establishment  which  is 
included  in  equipment,  buildings,  lands,  leases  and  any  other 
facility  of  production  of  the  finished  ordnance  article.  What- 
ever it  may  need  in  the  way  of  inventories  of  facilities  it  gets 
from  the  plant  investigating  branch,  and  calls  on  the  cost 
accounting  branch  for  audits  of  the  books  of  the  contractor 
claimant. 

In  its  placing  of  orders  or  contracts  the  Ordnance  Office 
found  many  manufacturing  concerns  with  organizations  suited 
to  manufacture  products  of  the  kind  wanted  for  war  purposes, 
but  whose  capacity  was  nothing  like  that  needed.  By  ad- 
vancing capital  for  increasing  facilities  to  double  or  more  that 
of  the  would-be  contractor,  or  by  agreeing  to  pay  a  price  for 
the  article  which  would  amortize  the  increased  cost  of  the 
extra  facilities,  the  capacity  required  by  the  government  was 
supplied.  Then  care  had  to  be  taken  against  these  claims 
coming  in  in  any  other  form.  The  facilities  branch  covered 
these  elements. 

(d)  The  finance  and  cost  accounting  branches  furnished  the 
claims  staff  branch  with  information  relating  to  the  costs  of 
operations,  the  prices  of  materials,  the  overhead  charges,  the 
distribution  of  expenses,  payments  to  contractors,  counter- 
claims and  financial  matters  generally  embraced  within  a 
comprehensive  accounting  and  audit  of  claims. 

22 


324  GOVERNMENT   WAR   CONTRACTS 

These  four  lines  of  investigation  into  the  contractor's  claim, 
if  we  add  the  points  covered  by  the  legal  adviser,  comprise  a 
reasonably  complete  inquiry  into  the  accuracy  and  validity  of 
the  elements  of  law  and  fact  involved.  These  inquiries  go  to 
establish  the  degree  of  soundness  of  the  contractor's  position  as 
a  basis  for  liquidation  of  the  government's  obligations,  when 
brought  together  in  the  claims  staff  branch.  There  they  were 
coordinated  and  a  report  made  to  the  district  claims  board  on 
which  report  action  was  taken  by  that  board  and  on  which  the 
board  based  its  findings  and  recommendations. 

Did  the  government  and  the  contractor  receive  fair  treat- 
ment in  the  effort  as  thus  organized  to  effect  prompt  settle- 
ment for  the  enormous  volume  of  claims?  It  is  certain  that 
the  investigating,  auditing  and  accounting  services  of  the 
various  claims  staffs  of  the  district  claims  boards,  if  that  of  the 
Philadelphia  district  be  taken  as  representative,  deserve  a 
large  part  of  the  credit  of  saving  the  postwar  contractors  from 
bankruptcy.  They  also  saved  the  government  from  recog- 
nized exaggerated  claims.  But  for  these  technically  equipped 
investigators  neither  contractor  nor  government  could  have 
expected  to  arrive  at  a  fair  and  just  settlement  based  on  fact 
and  law  alike.  But  by  means  of  these  aids  the  path  to  ad- 
justment was  cleared  in  a  comparatively  short  period  of  time. 
They,  armed  with  the  writ  of  investigation  issued  by  the  claims 
branch  of  which  they  are  members,  constitute  the  flying  wedge 
of  inquiry  into  the  intricate  maze  of  contractual  relations  and 
conditions,  bringing  order  and  justice  out  of  what  otherwise 
might  have  turned  into  chaos. 

How   THE    Claims   Staff    Branch   Was    Organized 

In  its  structural  character  the  claims  staff  branch  might  be 
properly  designated  as  the  "neck  of  the  bottle,"  and  in  its 
functional  character  as  the  brain  of  the  investigating  service. 
The  claims  board  itself  retained  the  supervisory  and  judicial 
functions,  putting  the  burden  of  investigation  and  contact 
with  the  industrial  processes  on  the  claims  staff  branch.  To 
the  claims  staff  branch  also  fell  the  task  of  preparing  the  forms, 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  325 

inquiring  into  counterclaims,  supplying  the  technical  talent, 
briefing  its  own  results  and  reviewing  each  part  or  element  of 
investigation  that  went  to  make  up  the  consolidated  and 
coordinated  return  on  the  contractor's  claim.  Its  branch 
board  of  review  was  composed  of  the  full  membership  of 
seven;  with  a  secretary,  an  assistant,  and  a  recording  and 
routing  clerk. 

The  main  internal  or  staff  work  of  the  branch  was,  however, 
divided  up  on  functional  lines  as  follows : 

1.  Forms  and  methods  committee,  of  five  members. 

2.  Counterclaims  committee,  of  five  members. 

3.  Technical  committee,  of  seven  members. 

4.  Briefing  committee,  of  six  members. 

In  the  handling  of  claims,  four  copies  are  received  from  the 
claims  board's  secretary  by  the  claims  staff  branch's  secretary, 
who  routes  them  through  the  four  committees  in  the  order 
given  above,  unless  the  forms  and  methods  committee  finds 
that  the  claim  is  not  made  out  according  to  Instructions  to  the 
contractor.  In  that  event  the  defectively  prepared  claim  is 
returned  to  the  secretary  of  the  claims  board  and  the  return 
noted  on  the  records  of  the  branch  board  of  review.  If 
correctly  prepared  it  goes  at  once  to  the  counterclaims  com- 
mittee, where  it  Is  examined  as  to  the  nature  of  the  contract. 
Then  the  examination  begins  into  the  merits  of  the  claim  and 
for  the  discovery  of  any  information  that  may  disclose  a 
counterclaim  against  the  contractor.  This  Is  done  by  means 
of  a  writ  of  Investigation  Issued  by  the  branch  board  of  review 
to  the  five  different  divisions,  including  subcontract,  plant 
facilities,  plant  investigation,  finance  and  cost  accounting. 
Out  of  the  reports  received  from  each  and  all  of  these  regard- 
ing the  counterclaims  the  counterclaims  committee  makes  a 
statement  for  the  use  of  the  branch's  briefing  committee. 

The  technical  committee  likewise  examines  the  claim,  and 
for  the  purpose  of  obtaining  the  necessary  information  sends 
out  writs  of  investigation  through  the  board  of  review  to  the 
various  branches.  On  the  basis  of  the  final  reports  thus 
received  the  technical   committee  reviews  the  claim  as  to 


326  GOVERNMENT   WAR   CONTRACTS 

matters  of  a  technical  nature  that  may  be  of  interest  to  the 
board,  but  reporting  its  findings  to  the  briefing  committee. 
The  briefing  committee  considers  the  facts  and  results  as 
brought  out  by  the  investigation  committees  and  branches 
and  prepares  a  brief  of  the  claim  to  lay  before  the  board  of 
review  for  approval  or  disapproval.  If  approved,  the  secre- 
tary sends  nine  copies  of  the  brief  with  underlying  reports 
and  original  papers  and  exhibits  to  the  secretary  of  the  claims 
board. 

This  completes  the  presentation  of  the  claim,  its  counter- 
claim and  the  investigation  of  the  merits  of  the  case  as  thus 
formulated.  All  of  this  is  summed  up  in  the  branch  brief, 
which  is  the  real  matter  before  the  adjudicating  authority — 
the  district  claims  board.  For  the  expeditious  disposal  of 
the  matters  assigned  to  each  contributing  part  of  the  service 
much  depends  on  the  chairman  and  the  secretary  of  the 
claims  staff  branch.  The  latter  especially,  being  charged  with 
the  duty  of  making  up  a  schedule  of  inquiries  and  hearings, 
must  keep  track  of  time  allowances  for  investigations  and 
report  delays  or  changes  in  dates  so  as  to  secure  due  coordina- 
tion of  the  factors  that  enter  into  the  maintenance  of  a  uniform 
schedule  of  hearings.  Here  progress  charts  come  in,  along 
with  daily  contact  with  the  branches  and  the  liaison  functions. 
The  claims  staff  branch  determines  from  the  reports  what 
witnesses  are  to  be  called  for  the  government  at  the  hearings 
before  the  board,  whose  secretary  sees  to  their  presence  on 
scheduled  dates.  The  board  itself,  desiring  further  investiga- 
tion, applies  to  the  claims  staff  branch  through  its  secretary 
for  inquiry  into  subcontracts,  for  instance,  not  only  within 
the  Philadelphia  district,  but  also  in  other  districts.  These 
are  handled  through  the  subcontract  branch.  The  claims 
staff  branch  has,  therefore,  relations  not  only  with  con- 
tractors in  its  own  district,  but  may  have  to  follow  the  rela- 
tions into  outside  districts  and  reciprocate  on  their  behalf. 

Organization  of  the  Five  Investigating  Divisions 

The  external  work  of  the  claims  staff  branch  is  primarily 
to  investigate.     Evidently  the  thoroughness  with  which  the 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  327 

contract  claims  are  investigated  and  the  interests  of  the  gov- 
ernment looked  after  in  the  settlement  of  war  contracts  de- 
pends primarily  on  three  things.  First,  the  capability  of  the 
board  individually  and  collectively  considered.  Secondly, 
on  the  elements  of  mastery  embraced  in  the  composition  of 
the  claims  staff  branch,  and,  finally,  in  the  extent  to  which 
the  five  investigating  divisions  of  the  claims  staff  branch  are 
used  effectively  to  exhaust  the  merits  of  the  claim,  with 
balanced  regard  to  what  may  be  fair  and  equitable  to  both 
contractor  and  government. 

Owing  to  the  fundamental  importance  of  these  investiga- 
ing  branches  in  this  vital  work  of  contract  adjustment,  some 
brief  outlining  of  their  organization  is  pertinent  to  an  ade- 
quate treatment  of  the  subject.  For,  in  their  make-up,  even 
in  mere  outline,  is  revealed  the  grasp  of  the  problem  of  the 
proportions  never  before  undertaken.  This  organizing  and 
operating  service  was  the  joint  result  of  several  factors,  of 
which  mention  will  be  made  later.  The  working  outline 
follows : 

I.  Subcontract  Division:  j  members  and  legal  adviser — 

A.  Executive  officer,  controlling  recording  and  routing, 
office  manager,  and  office  force  in  general. 

B.  Analysis  board,  3  officers. 

C.  Review  board,  3  officers. 

D.  Working  assignment  of  classified  claims: 

(a)  Claims  in  Philadelphia  district,  4  members. 

(b)  Other  claims  in  that  district,  3  members. 

(c)  Claims     of     DuPont    Company,     Mr.     C.    H. 
Fleming. 

(d)  Claims   of    Bethlehem   Steel   Company,   Capt. 
W.  N.  Bannard. 

(e)  Claims   of   Midvale  Steel  Company,  Capt.  H. 
L.  Cox. 

(f)  Claims  from  other  districts,   Capt.  E.  F.   Ran- 
dolph. 

(g)  DuPont  engineering  claims,  2  officers, 
(h)  Miscellaneous,  3  officers. 


328  GOVERNMENT    WAR    CONTRACTS 

In  order  to  grasp  the  fuller  significance  of  ordnance  investi- 
gations as  related  to  contract  settlement,  one  must  recall  the 
production  side  of  the  ordnance  contracts.  The  entire 
country  during  1918  was  districted  into  eleven  ordnance 
divisions.  Each  district,  under  the  decentralizing  policy  of 
control  over  manufacturing  was  organized  so  as  to  be  practi- 
cally self-dependent  in  operation.  It  had  an  ordnance  chief 
and  representatives  of  the  several  divisions  of  the  Ordnance 
Department.  In  fact,  the  district  unit  was  in  an  essential 
sense  an  ordnance  office  in  minature.  That  plan  of  organiza- 
tion brought  the  technical  officials  into  close  and  effective 
contact  in  production.  Of  this  the  Chief  of  Ordnance,  in  his 
too  brief  report  of  191 8,  thus  speaks: 

There  has  been  established  in  this  division  a  technical  section,  composed  of 
highly  trained  technical  experts,  to  advise  and  assist  manufacturers.  From  time 
to  time  these  experts  visit  manufacturing  establishments,  offering  professional 
advice  and  assistance  in  cooperation  with  the  staff  of  the  district  officers.  Fre- 
quent conferences  are  held  in  the  various  districts  in  which  manufacturers  engaged 
in  the  production  of  similar  ordnance  material  assemble  and  meet  officers  of  the 
production  division  for  the  discussion  of  any  problems  which  may  be  presented. 
Results  show  conclusively  that  these  meetings  are  highly  beneficial  and  are  con- 
sidered by  manufacturers  to  be  of  paramount  importance.'- 

It  was  such  familiarity  with  the  problems  of  production 
that  developed  a  capacity  for  solving  the  problems  of  liquida- 
tion of  the  ordnance  accounts.  Fortunately  for  the  needs  of 
the  postbellum  business  situation,  the  army  specialists,  joining 
with  the  business  executives  and  the  professional  accountants, 
constituted  a  highly  specialized  group  of  war  industry  ex- 
perts. It  has  been  one  of  the  best  proofs  of  the  sound  econo- 
mic judgment  of  the  war  authorities  that  these  men  were 
brought  together  upon  this  task  in  the  critical  after  war 
adjustment. 

In  the  classification  of  subcontracts  for  the  purpose  of 
clearing  up  claims  there  was  no  room  for  other  than  a  grouping 
on  the  basis  of  the  contracting  concern  as  the  unit.  That  is 
the  feature  of  the  assignment  of  investigators  in  the  foregoing 
outline.     Some  one  is  placed  in  charge  of  the  subcontracting 

1  Report  of  the  Chief  of  Ordnance,  1918,  p.  12. 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT  329 

relations  of  each  large  prime  contractor  and  has  his  associates 
and  staff  to  do  justice  to  the  phase  of  the  problem  entrusted  to 
him.  Thus  specialization  is  utilized  to  advantage.  The 
affairs  of  the  given  contractor,  as  for  instance,  the  DuPont 
Company  or  the  Bethlehem  Steel,  are  thus  mastered  in  the 
service  of  intelligent  adjustment. 

When,  however,  it  comes  to  plant  investigation  a  different 
arrangement  of  work  follow^s.  Here  it  is  not  relations  with 
other  producers,  but  rather  the  special  products  that  are  the 
subject  of  inquiry.  Consequently  the  division  of  labor  is  on 
a  commodity  basis. 

2.  Plant  Investigation  Division:  5  members — 

A.  Analyzing  board,  8  members. 

B.  Board  of  review,  5  members. 

C.  Secretary  and  recording  and  routing. 

D.  Investigating   sections: 

(a)  Projectile  section,  7  members. 

(b)  Trench  warfare  section,  5  members. 

(c)  Powder  and  explosives,  7  members. 

(d)  Gun  carriages,  4  members. 

(e)  Small  arms — steel  and  wood,  6  members. 

(f)  Miscellaneous,    machinery    and    containers,    6 
members. 

(g)  Small  arms  ammunition,  i  officer, 
(h)   Oils,  preserving,  i  officer. 

(i)  Special  investigation,  8  members. 

Besides  investigating  under  writ  from  the  claims  staff 
branch,  to  which  the  report  goes  by  way  of  the  board  of  re- 
view, this  division  handles  requests  for  inventories  or  apprais- 
als from  either  J:he  plant  facilities  division  or  the  cost  ac- 
counting division.  In  the  matter  of  plant  valuations  it  is 
the  final  authority. 

3.  Plant  Facilities  Division — 3  members — 

One  feature  of  the  Ordnance  Office  policy  was  to  utilize  the 
industries  of  the  country  for  the  production  of  the  major 


330  GOVERNMENT    WAR    CONTRACTS 

portion  of  its  needed  quota  of  munitions.  The  government's 
arsenals,  for  example,  produced  about  one-seventh  of  the  rifles 
required  for  foreign  service.  But  private  enterprise  would 
not,  indeed  could  not,  be  expected  to  put  its  own  capital  into 
the  enlargement  of  its  buildings,  the  purchase  and  installa- 
tion of  machinery  and  the  leasing  or  ownership  of  lands,  to 
say  nothing  of  extending  public  utilities  for  so  large  an  increase 
in  workers  at  any  given  industrial  center.  The  large  iron 
and  steel  industries  within  the  Philadelphia  district  lent  them- 
selves to  the  urgent  needs  of  the  government,  and  to  these 
the  public  funds  were  advanced  on  terms  varying  with  the 
circumstances  and  conditions.  This  accounts  for  the  appear- 
ance of  plant  facilities  as  so  important  an  item  in  many  of  the 
claims  settlements.  In  this  district  a  special  staff  of  investi- 
gators was  organized  to  deal  with  the  subject.  Its  features 
were  as  outlined  herewith : 

A.  Analysis  board  of  8  members  with  a  civilian  chair- 
man.    This  board  had  jurisdiction  in  the  matter  of: 

(a)  Land  leases  and  liens,  2  members. 

(b)  Buildings,  2  members. 

(c)  Machinery  and  equipment,  2  members.  For 
the  largest  plants  there  were  appointed  individual 
investigators,  as  shown  in  the  following: 

(d)  Bethlehem  Steel  Co.,  Mr.  H.  B.  Hackett. 

(e)  Midvale  Steel  and  Ordnance  Rifle  Plant,  Maj. 
W.  H.  Tilton. 

(f)  Midvale  Steel  and  Ordnance  Gun  Plant,  Capt. 
H.  L.  Cox. 

(g)  Loading  plants,  Maj.  H.  W.  Goddard. 
(h)   Marlin-Rockwell,  Lt.  R.  S.  Guerber. 

(i)   Eddystone  Munitions  Co.,  Maj.  J.  A.  Brown. 
(j)  Miscellaneous. 

Besides  these  there  were  the  following  boards:  inventory, 
review  and  salvage. 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  33 1 

4.  Finance  Division:  j  members — which  investigates  the  fol- 

lowing features  of  the  settlement  claims : 

1.  Financial  standing  of  contracting  parties. 

2.  Relations  of  prime  contractors  to  subcontractors. 

3.  Counterclaims,  advance  payments,  etc. 

5.  Cost  Accounting  Division:  j   members — which  divides  its 

work  into  the  following  lines : 

1.  Analysis  board,  5  members. 

2.  Review  board,  5  members. 

3.  In  charge  of  cost-plus  contracts: 

(a)  Midvale  Steel  and  Ordnance  (Eddystone),  with 
staff  of  one  chairman,  4  accountants  and  14  clerks. 

(b)  Midvale   Steel    and    Ordnance,    general    plant, 
with  one  chairman  and  3  clerks. 

(c)  Tacony  Ordnance  Corp.,  i  head  and  4  clerks. 

(d)  McArthur  Bros.,  i  head,  2  accountants,  4  clerks. 

(e)  J.  G.  Brill  Co.,  i  head,  2  accountants,  6  clerks. 

4.  In  charge  of  claims  investigation. 

5.  Assistant  supervisors  (6),  junior  accountants  (6),  and 
clerks  qualified  in  accounting  (17). 

This  completes  the  outline  organization  of  the  five  investi- 
gating branches  or  divisions  of  the  claims  board  branch.  It 
serves  to  indicate  into  what  matters  each  of  the  several 
activities  is  directed,  so  as  to  cover  the  entire  field  of  contract 
claims  in  the  course  of  settlement.  These  five  different 
branches  are  the  sources  of  the  results  which  are  combined 
into  the  complete  return  on  a  given  claim,  for  the  action  of 
the  claims  board  branch,  before  submission  with  recommenda- 
tions to  the  Ordnance  District  Claims  Board.  If  the  con- 
tractor accepted  the  conclusions  of  the  claims  board,  the 
agreement  is  put  into  writing,  forwarded  to  Washington  for 
approval  or  rejection,  and  if  approved  is  promptly  paid  for 
and  the  contractual  relations  closed.  As  has  been  stated,  in 
the  vast  majority  of  cases  the  approval  of  the  departmental 
authorities   after   review   at  Washington  was  given  to  the 


332  GOVERNMENT   WAR   CONTRACTS 

district  claims  boards  findings  as  accepted  by  the  contractor. 
In  the  terms  of  settlement,  the  contractor  often  accepted 
property  at  agreed  prices;  but  where  that  was  not  the  case, 
the  property  retained  by  the  government  was  either  stored, 
removed  or  turned  over  to  the  sales  director  to  dispose  of  at 
the  best  terms  obtainable.     That  ended  the  chapter. 


CHAPTER   IV 

Summary  and  Conclusions 

One  of  the  first  things  to  impress  itself  upon  the  reviewer  of 
war  time  contracting  is  the  fact  of  the  enlargement  in  both 
the  range  and  the  variety  of  economic  experience  through 
which  the  government  and  business  passed  within  these  few 
years.  One  of  the  revelations  has  been  the  prominence  of 
public  spirit  as  a  factor  in  war  time  enterprise.  It  is  not  too 
much  to  say  that  w^ar  service  infused  a  new  altruistic  element 
into  economic  life.  Another  outcome  has  been  the  discov- 
ery of  vast  and  as  yet  undeveloped  powers  of  cooperation 
between  private  enterprise  and  governmental  authority. 
The  traditions  of  American  business  had  theretofore  rather 
been  those  of  antagonism  between  these  two  sources  of  eco- 
nomic power.  As  a  consequence  American  efforts  had  been 
handicapped  in  the  field  of  international  competition  as  com- 
pared with  other  countries.  If  the  war  shall  have  taught  the 
value  of  working  together  in  international  enterprise,  the  gov- 
ernment will  have  learned  one  of  its  most  needed  lessons. 

Another  conclusion  from  a  retrospective  survey  of  public 
contracting  is  that  the  government  has  come  to  appreciate 
more  fully  the  value  of  large  scale  business  organization  as  a 
means  of  economic  achievement.  This  was  demonstrated  in 
the  mediating  service  of  the  various  trades  organizations  in 
marshaling  their  industrial  and  commercial  membership  to 
meet  the  needs  of  the  government  early  in  the  war  period. 
For  example,  the  knit  goods  trade  and  industry  was  never 
united  until  the  needs  of  the  army  and  navy  had  made  unity 
of  action  among  its  members  of  vital  importance  in  supplying 
this  class  of  products.  Such  an  emergency  seemed  to  bring 
forward  the  right  leaders  and  to  inject  the  right  attitude  into 
the  trade  to  ensure  a  high  grade  of  cooperation. 

Among   the   engineering  organizations   of   the   country   a 

333 


334  GOVERNMENT    WAR   CONTRACTS 

similar  result  was  seen  in  the  capacity  of  American  profes- 
sional and  business  organizations  to  cooperate  in  public 
services.  Much  the  same  may  be  said  of  the  accounting  and 
the  legal  professions.  Probably  the  government,  In  these 
few  years  of  contracting  for  war  purposes,  derived  more  ad- 
vantage from  the  voluntary  cooperation  of  the  three  profes- 
sions of  law,  engineering  and  accounting  than  from  any  other 
three  that  could  be  named.  These  three  at  every  stage  of  the 
drafting  and  execution  of  contracts,  in  which  the  government 
had  billions  of  costs  at  stake,  rendered  continuous  and  expense 
saving  services.  In  no  stage  of  the  relation  of  contractor  to 
government  did  they  jointly  appear  to  more  advantage  than 
in  the  cancelation,  liquidation  and  final  settlement  of  these 
contracts.  Their  services  in  expediting  settlements  have 
been  exceptional. 

War  contracting  had  a  very  marked  effect  on  the  position 
of  the  economically  superfluous  middleman  in  trade  with  the 
government.  In  the  navy  before  the  war  it  had  been  the 
rule  that  "no  person  shall  be  received  as  a  contractor  who  is 
not  a  manufacturer  of,  or  regular  dealer  in,  the  article  which 
he  offers  to  supply."^  This  kept  out  the  man  who  carries  his 
office  in  his  hat.  In  the  War  Department,  as  in  every  other 
department,  after  June  i6,  1916,  under  the  National  Defense 
Act,  the  Attorney  General's  suggestion  was  made  effective 
then  and  thereafter.  According  to  that  every  bidder  had  to 
agree  that  he  had  employed  no  third  person  to  solicit  or  obtain 
his  contract  and  promised  not  to  pay  to  any  third  person  any 
compensation  on  that  account.  Revised  Statutes,  section 
3737,  forbade  transfer  of  contract  or  order,  thus  supporting 
direct  dealings  between  contractor  and  government. 

War  Time  Status  of  the  Government  Contract 

From  what  has  thus  far  been  seen  It  is  plain  that  the  gov- 
ernment contract  itself  has  undergone  a  marked  transforma- 
tion in  passing  from  peace  to  war  service.  As  an  instrument 
of  public  bargaining  with  private  concerns,  the  status  of  both 

1  Revised  Statutes,  sec.  3722,  p.  735. 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  335 

of  the  parties  to  the  agreement  has  changed.  It  ceased  to  be 
simply  an  isolated  resultant  of  the  free  play  of  economic  ele- 
ments in  the  open  market  under  normal  conditions  of  supply 
and  demand.  The  position  of  the  contractor,  instead  of  being 
determined  by  competitive  bidding,  in  war  becomes  largely  the 
result  of  compulsory  cooperation.  He  is  no  longer  free  to  act 
as  an  independent  individual;  he  figures  rather  as  a  member 
of  his  trade  or  industrial  organization.  Collective  judgment, 
rather  than  individual  enterprise,  determines  his  relation  to 
the  government  in  supplying  the  resources  of  the  nation  to 
meet  the  demands  of  war.  The  statutory  criterion  of  com- 
pensation defines  his  interest  as  a  price  that  is  fair  and  just — 
nothing  less  and  nothing  more. 

In  like  manner  the  position  of  the  government,  the  other 
party  to  the  contract,  has  changed.  In  the  peace  time  con- 
tract the  contracting  officer  represented  the  government. 
He  signed  for  the  United  States,  although  representing  only  an 
isolated  bureau  or  division.  But  under  the  coordination  of 
purchasing  power,  of  contracting  scope  running  into  hundreds 
of  millions  of  dollars  a  month,  the  governmental  side  of  the 
bargaining  equation  becomes  a  colossal  engine  of  command 
over  goods  and  services.  This  organization  was  mighty 
enough  to  fix  price  levels  for  the  market  as  a  whole,  by  the 
cooperation  of  the  War  Industries  Board  and  under  the 
mastery  of  a  single  director  as  the  official  contracting  head. 

Theory  of  the  Contractor's  War  Time  Position 

A  further  comparison  of  the  position  of  the  contractor  in 
war  time  w4th  that  of  times  of  peace  serves  to  bring  out  still 
another  change.  In  peace  his  responsibility  is  much  wider 
and  his  share  in  assuming  risks  is  much  more  extended. 
Under  competitive  conditions  of  award  he  has  to  take  his 
chances  with  all  others  on  the  common  plane  of  responsibility, 
be  that  technical,  financial  or  commercial  in  character.  But 
in  war  time,  at  a  period  when  materials,  labor  and  funds  are 
all  considered  as  first  of  all  at  the  sersace  of  the  government, 
the  theory  of  the  contract  shifts,  like  every  other  economic 


336  GOVERNMENT   WAR   CONTRACTS 

arrangement,  to  the  war  time  basis.  In  making  this  shift, 
however,  the  government  often  takes  over  the  risks  of  enter- 
prise. The  contractor  becomes  the  cooperator  with  the  gov- 
ernment, rather  than  the  competitive  performer  on  a  project 
in  which  the  hazards  of  the  enterprise  still  lie  on  his  side  of  the 
equation.  But  what  the  contractor  lacks  in  economic  hazards 
he  adds  in  fiduciary  obligation.  In  other  words,  war  time 
contracting  puts  the  contracting  party  in  the  position  of  hav- 
ing his  compensation  practically  guaranteed,  but  binds  him  to 
work  for  and  with  the  government  to  accomplish  the  object 
quickly.  The  very  purpose  of  releasing  him  from  contractual 
risks  and  of  assuring  him  a  given  recompense  is  to  divest  him 
of  those  claims  of  self-interest  in  order  that  he  may  be  free 
to  serve  the  government  in  the  fiduciary  capacity  of  a  war 
worker.  It  makes  no  difference  whether  the  contractor  be  an 
individual  or  a  corporation;  or  whether  he  be  executing  a 
fixed  price,  a  cost-plus  or  an  agency  contract;  his  having 
divested  himself  of  the  risks  of  an  undertaking  and  having  be- 
come assured  by  contract  of  the  costs  being  covered  and  a  safe 
margin  of  profit,  the  center  of  gravity  of  his  responsibility 
passes  to  the  status  of  more  intense  cooperation  with  govern- 
ment.   Anything  less  is  a  clear  evasion  of  obligation. 

On  this  vital  principle  of  fiduciary  relation  of  the  agent  to 
the  project  the  American  International  Shipbuilding  Cor- 
poration at  Hog  Island  took  the  less  defensible  position  of 
nonliability  for  the  unfavorable  results  and  methods  there  . 
disclosed.  Its  officers  assumed  the  attitude  indicated  in  the 
following,  in  reply  to  a  charge  of  mismanagement: 

1.  That  each  substantial  act  of  the  agent  was  approved,  expressly  or  impliedly, 
by  the  Fleet  Corporation  or  its  representatives. 

2.  That  if  the  F"leet  Corporation  was  dissatisfied  with  the  management  its 
remedy  under  the  contract  was  to  terminate  the  agency;  that  it  could  not  have  the 
benefits  of  the  agent's  continuous  management  and  at  the  same  time  charge  the 
agent  with  mismanagement. 

3.  That  the  Fleet  Corporation  in  placing  an  additional  order  with  the  agent 
on  May  7,  1918,  with  full  knowledge  of  past  conditions,  waived  any  charges  of 
waste  and  mismanagement  and  admitted  by  its  conduct  that  the  agent  was  worthy 
of  its  agency  and  entitled  to  receive  additional  trust  and  responsibility. 

4.  That  when  all  is  said  and  done  this  was  a  war  job  where  speed  was  of  the 
essence,  and  that  an  undertaking  of  such  a  nature  is  to  be  judged  not  by  its  costs 
but  by  its  accomplishments. 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  337 

This  alleged  defense  is  not  wholly  in  line  with  fact.  It  is 
wholly  out  of  line  with  the  lawful  right  of  the  government  to 
review  the  acts  of  its  agents  at  later  dates.  The  fact  is  that 
the  agency  contract  relation  is  a  most  intimate  assumption  of 
business  accord  as  between  contractor  and  government.  So 
much  so  is  this  the  case  that  the  datum  of  confidence  and 
cooperative  capacity  is  assumed  as  an  essential  condition  of 
entering  into  the  contract  of  the  agency  type.  A  corporation's 
managers  and  advisers  who  lack  this  concept  of  contractual 
duty,  so  far  as  to  excuse  themselves  from  due  vigilance  against 
gross  mistakes  on  an  emergency  project,  attempt  to  evade 
joint  responsibility.  On  such  a  policy  of  evasion,  no  contract- 
ing concern  w^ould  dare  to  build  a  reputation  for  fiduciary 
trustworthiness. 

Fiduciary  Position  of  Agency  Contractors 

One  can  not  go  far  into  the  field  of  government  contracting 
in  the  war  without  realizing  that  many  of  the  concerns  which 
got  jobs  on  the  agency  basis  did  not  measure  up  to  the  confi- 
dence imposed  in  their  competence  and  fidelity.  Possibly 
the  heads  of  firms  may  have  entertained  the  higher  concep- 
tion of  fiduciary  service  in  war  time;  but  it  is  none  the  less 
the  fact  that  in  the  execution  of  the  work  in  both  method  and 
quality,  as  well  as  in  the  profiteering  purpose  controlling  the 
jobs,  the  active  officials  in  charge  worked  on  a  much  lower 
level  of  what  was  due  to  the  government.  In  the  agency  con- 
tract the  government  assumes  all  the  risk  for  the  express  pur- 
pose of  getting  the  use  of  the  agent's  organization  and  oper- 
ating heads  at  cost.  This  cost  it  covers  in  a  fee  presumed  to 
be  generous  enough  to  insure  the  contracting  agent's  coming 
out  even. 

A  good  instance  of  this  kind  is  reported  in  the  agency  con- 
tract of  the  Marlin-Rockwell  Loading  Company,  March  23, 
1 91 8,  for  the  erection  and  operation  of  loading  drop  shells, 
on  a  10  per  cent  cost-plus  contract.  In  addition  to  that  the 
agent  was  to  be  paid  10  per  cent  on  the  cost  of  operation  until 
one-fourth  of  the  specified  number  of  bombs  had  been  loaded. 


338  GOVERNMENT   WAR    CONTRACTS 

That  rate  was  to  continue  until  the  government  should  arrive 
at  a  basic  cost,  when  the  agent  was  to  get,  in  addition  to  its 
10  per  cent,  one-half  of  the  difference  betAveen  the  basic  and 
the  actual  cost,  so  long  as  its  total  profit  did  not  exceed  15 
per  cent. 

This  was  presumably  a  generous  even  though  a  hazardous 
contract,  so  far  as  compensation  was  concerned.  Instead  of 
doing  the  work  themselves,  this  concern  subcontracted  the 
work  for  $6,500,000  for  a  fee  of  3  per  cent  on  cost. 

In  the  investigation,  which  followed  complaints,  it  was 
found  that  in  discharging  their  first  duty  to  select  a  site,  the 
company  put  the  matter  into  the  same  hands  as  those  which 
for  $3,000  an  acre  disposed  of  the  Hog  Island  tract  that  had 
been  offered  a  short  time  before  at  a  rate  of  $300  an  acre.  A 
large  part  of  the  land  was  under  w^ater  at  high  tide  when  a 
dike  broke  a  few  weeks  later.  In  its  designing  of  the  plant 
the  company  had  no  aptitude  nor  claim  to  such  a  job.  On 
operation  it  will  be  enough  to  quote  the  report  of  Major 
Clair  Foster,  after  his  visit  to  the  construction  locality,  where 
none  of  the  contracting  company's  staff  could  be  found, 
except  a  few  who  knew  nothing  and  had  been  brought  in  from 
jobs  of  quite  different  character.  Major  Clark  thus  summa- 
rizes the  exploiting  agent's  viewpoint: 

Regarding  the  Marlin-Rockwell  Company,  to  my  way  of  thinking,  the  outstand- 
ing fact  disclosed  by  this  inspection  is  that  that  company  failed  to  comprehend 
the  fundamental  difference  between  a  "contract"  for  the  performance  of  which  it 
would  be  entitled  to  make  whatever  money  it  could  by  risking  its  own  resources, 
and  a  trust  accepted  by  it  as  an  employe  of  the  government.  It  failed  to  see  that, 
risking  nothing  of  its  own  that  any  other  employe  is  not  risking,  it  was  engaged 
like  any  other  employe  of  the  government  to  forget  all  aViout  pay  day  and  to  work 
shoulder  to  shoulder  with  its  fellow  employes  for  the  common  good.^ 

War   Contracts   Had   First   Call   on   Capital 

The  theory  of  the  priority  of  war  business,  as  it  related  to 
capital  issues,  is  illustrated  by  the  operations  of  the  Capital 
Issues  Committee.  This  committee  was  not  authorized 
until  almost  a  full  year  after  the  war  began.     By  the  act  of 

^  Hearings  on  War  Expenditures,  Ser.  VI,  Vol.  I,  pp.  705-706. 


LIQUIDATION,    CANCELATION   AND   ADJUSTMENT  339 

April  5,  191 8,  it  took  over  the  work  of  the  Federal  Reserve 
Board,  which  had  exercised  restraining  control  on  capital 
issues  to  conserve  financial  resources  for  war  needs.  Its 
policy  was  to  authorize  "capital  for  use  only  by  those  enter- 
prises and  industries  which  served  some  immediate  or  definite 
military  or  economic  need. "  There  were  total  applications  for 
$2,564,021,000.  By  this  means  banking  and  investment  re- 
sources were  conserved  both  for  credits  to  contracting  con- 
cerns and  for  the  purchase  of  Liberty  bonds.  Out  of  a  total  of 
$2,064,803,000  passed  the  two  main  portions  were  for  public 
utilities  and  manufacturing — tw^o  divisions  of  enterprise  which 
had  direct  relation  to  the  war  industries  at  various  places. 
These  two  uses  made  up  three-fourths  of  the  entire  issues  ap- 
proved.^ These  results  are  to  be  taken  in  connection  with  the 
advances  of  capital  by  the  War  Credits  Board  to  various  war 
contractors. 

Methods  of  financing  war  contract  industries  developed 
with  experience.  It  took  nearly  a  year  to  see  that  on  a  scale 
of  production  so  stupendous  some  extraordinary  means  of 
supplying  capital  to  contractors  and  municipalities  affected 
thereby  must  be  provided.  Such  work  on  a  smaller  scale 
might  have  been  done  by  the  regular  banking  concerns  out  of 
their  ordinary  resources.  In  fact,  banks  are  as  a  rule  rather 
prone  to  welcome  government  contractor  accounts.  The 
war  industries,  many  of  them  highly  centralized  on  an  exten- 
sive range  of  outlays  and  advances  for  materials  and  to  sub- 
contractors, entailed  heavier  financing  than  was  deemed  wise 
for  the  local  banks  to  assume.  To  meet  these  needs  in  hun- 
dreds of  localities  where  war  orders  and  contracts  had  been 
placed  the  War  Finance  Corporation  was  created  by  Congress 
and  organized  with  a  capital  of  $500,000,000  and  an  author- 
ized issue  of  $3,000,000,000  in  bonds. ^  It  was  authorized  to 
"make  loans  to  banks  and  trust  companies  by  which  they 
were  to  finance  operations  necessary  or  contributory  to  the 
prosecution  of  the  war. "     The  policy  was  not  to  act  directly 

^  Report  of  Capital  Issues  Committee,  House  Document  No.  1485,  65th  Cong., 
3d  Sess.,  pp.  I,  5. 
2  Official  Bulletin,  May  20,  1918,  p.  8. 
23 


340  GOVERNMENT   WAR   CONTRACTS 

with  the  industries  but  to  make  approved  advances  through 
the  local  banks.  This  supplied  a  readily  available  reservoir 
of  credit  and  working  capital.  It  proved  to  be  one  of  the 
wisest  aids  to  relieve  ordinary  commercial  banking  and  at 
the  same  time  to  assist  industries  in  the  production  of  war 
materials  without  delays  for  want  of  financial  backing. 

Federal  Taxes  on  War  Contract  Profits 

On  the  economic  distribution  of  the  shares  of  wealth  pro- 
duced the  war  developed  some  marked  results.  The  unusu- 
ally high  rates  of  income  taxes  and  the  excess  profits  taxes  as 
levied  by  the  federal  authorities  were  an  attempt  to  recover 
some  of  the  extraordinary  gains  from  war  contracting.  Even 
before  the  United  States  entered  the  war,  the  munition  manu- 
facturer's tax  (approved  September  8,  191 6,  Title  III)  levied 
a  tax  of  12I  per  cent  on  the  entire  net  profits  of  such  industries. 
The  enormous  profits  of  the  contractors  for  European  coun- 
tries at  war  before  this  country  came  in  had  produced  a 
speculative  rise  in  security  values  in  the  iron  and  steel  indus- 
tries, as  in  others,  whereby  an  entirely  new  group  of  million- 
aires arose.  On  these  profits  the  taxing  powers  tried  to  lay 
hands,  only  to  find  that  after  a  year  or  two  wages  and  price 
levels  generally  had  risen  to  more  than  overtake  the  antici- 
pated profits.  In  the  case  of  some  of  the  small  arms  industries 
the  advances  in  labor  and  material  costs  were  such  as  to  bring 
severe  losses  to  the  contractors.  This  experience  was  dupli- 
cated elsewhere. 

The  munition  manufacturer's  tax  of  prewar  times  was  in- 
structive from  another  viewpoint.  It  attempted  to  define 
how  net  profits  were  to  be  arrived  at  by  specifying  the  several 
elements  that  might  be  included  in  the  costs  of  production 
(section  302,  of  act  cited).  In  the  next  act  of  Congress,  of 
March  3,  191 7,  passed  more  than  a  month  before  the  outbreak 
of  war  with  Germany,  the  first  real  war  tax  was  provided  for. 
It  levied  an  excess  profits  tax,  in  addition  to  the  munition 
manufacturer's  tax,  of  "8  per  cent  of  the  amount  by  which 
such  net  income  exceeds  the  sum  of  (a)  $5,000  and  (b)  8 
per  cent  of  the  actual  capital." 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  34 1 

This  impost  applied  only  to  corporations  and  partnerships 
in  this  form.  It  made  still  another  contribution  to  the  tech- 
nical side  of  economic  terms,  by  its  definition  of  invested 
capital.  By  section  203  of  this  second  of  the  war  measures, 
invested  capital  was  made  to  mean — 

(i)  Actual  cash  paid  in, 

(2)  The  actual  cash  value,  at  the  time  of  payment,  of  assets 
other  than  cash  paid  in,  and 

(3)  Paid  in  or  earned  surplus  and  undivided  profits  used  or 
employed  in  the  business,  but  not  including  borrowed  money. 

A  third  stage  in  the  effort  of  Congress  to  take  for  public  use 
a  part  of  the  profits  of  war  industries  and  incomes  came  with 
the  Revenue  Act  of  October  3,  191 7.  Its  features  were  the 
■  graduated  income  and  excess  profits  taxes.  After  the  income 
tax  returns  and  excess  profits  taxes  of  March  3,  191 7,  had 
been  compiled  in  the  office  of  the  Commissioner  of  Internal 
Revenue,  it  was  apparent  that  the  profits  of  practically  all 
the  main  kinds  of  corporations  could  easily  stand  a  much 
heavier  rate  of  excess  profits  taxes.  Consequently,  as  the 
war  contracting  had  enriched  trades  and  industries  phenom- 
enally, as  the  Borah  Report  proved  beyond  dispute,  a  war 
excess  profits  tax  of  "  60  per  cent  of  net  income  in  excess  of  33 
per  cent  of  such  capital,"  was  not  considered  unduly  burden- 
some as  the  maximum  rate.  The  attempt  to  forestall  an 
admittedly  general  evasion  of  war  profits  taxes,  by  a  more  rigid 
form  of  reports  and  returns,  as  proposed  by  Senator  King  of 
Utah,  in  the  course  of  the  enactment  of  the  act  of  October  3, 
1917,  failed  of  approval,  largely  for  administrative  reasons. 
There  was  not  any  doubt  on  the  question  of  the  government 
not  getting  anything  like  the  proportion  of  excess  war  profits 
that  European  governments  did. 

Congressional  Criticism  and  War  Contracts 

It  has  already  been  pointed  out  that  Congress  had  com- 
paratively little  to  do  directly  with  the  military  part  of  the 
war,  but  that  its  services  consisted  mainly  in  discussion  and 
inquiries  as  to  the  economics  of  expenditures  for  the  conflict. 


342  GO\^RNMENT   WAR   CONTRACTS 

In  doing  that,  it  must  of  course  not  be  assumed  that  Congress 
made  a  point  of  interfering  with  the  administrative  part  of 
war.  It  was  rather  in  the  line  of  seeing  that  the  laws  of  Con- 
gress were  observed,  that  the  policies  of  the  administration 
were  pursued  along  fair  and  just  lines,  and  that  the  fiscal 
ways  and  means  were  supplied  in  quantities,  kinds  and  at 
times  when  most  needed.  It  was,  in  short,  the  business  of 
Congress  to  see  in  a  general  but  substantial  way  that  the  game 
of  war  from  the  business  side  was  played  with  as  much  re- 
gard to  fairness  as  the  circumstances  of  war  admitted. 

Congress  in  this  capacity  occupied  itself  in  seeing  to  it  that 
the  contractor  did  not  get  too  much  the  better  of  the  bargain 
in  his  dealings  with  the  government ;  and  also  that  the  govern- 
ment did  not  in  its  exercise  of  power  unduly  overreach  the  con- 
tractor. Congress  thus  became  an  economic  arbiter  between 
the  two  parties  to  the  war  contract,  in  a  much  larger  sense 
than  is  generally  appreciated.  It  gave  a  prompt  protection 
to  the  public  interest  by  its  investigations;  and  when  the 
government  became  overweening  it  was  a  strong  reminder  to 
public  authorities  that  even  though  this  was  a  war  era  still 
the  public  law  rather  than  official  will  was  the  source  of 
authority.  The  vigilance  of  Congress  is  therefore  one  of  the 
reasons  why  a  nation  usually  comes  out  of  war  with  a  stronger 
grip  on  the  rights  of  person  and  of  property.  In  its  investiga- 
tion into  the  contracting  activities  of  some  of  the  advisory 
committees  of  the  Council  of  National  Defense  it  restored  the 
constitutionally  provided  function  of  the  departments.  It 
also,  in  the  same  inquiry,  relieved  the  contracting  public  from 
having  to  deal  with  other  than  the  legally  authorized  officials. 
Finally,  as  in  the  Dent  Act,  it  passed  after  due  discussion  such 
enabling  legislation  as  was  necessary  to  settle  on  fair  terms 
with  contractors  who  had  begun  work  in  good  faith  but  with- 
out a  formal  contract.  This  act  had  much  to  do  with  the 
expedition  with  which  the  War  Department  liquidated  the 
unfinished  contracts  in  which  the  armistice  caught  the  war 
•contracting  industries. 

On  the  side  of  control  of  war  expenditures  Congress  did  not 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  343 

figure  very  creditably.  Early  in  1917  it  was  proposed  that 
Congress  should  be  represented  in  some  way  in  seeing  that 
the  vast  amounts  it  was  appropriating  were  properly  applied. 
That  was  parried  by  the  shallow  excuse  that  it  would  "reflect 
on  the  administration."  The  aircraft  fizzle  proved  that  its 
fears  were  not  ungrounded.  But  the  proposal  never  came  to 
anything  and  Congress  during  the  entire  war  practically 
voted  everything,  without  much  question,  that  was  asked 
officially.  The  hearings  before  the  Appropriations  Com- 
mittees prove  that  this  was  not  done  without  some  formal 
inquiry  as  to  purpose  and  adequacy  of  the  estimates  submitted 
for  Congressional  approval.  Apart  from  these  committee 
hearings  there  was  little  discussion  on  the  requests  of  the 
administration's  spokesmen  for  billions  of  authorizations 
either  in  bond  issues  or  taxes  to  be  raised.  In  fact,  Congress 
was  a  unit  in  approving  most  of  these  measures  required  for 
the  financing  of  the  war,  because  of  its  faith  in  the  justness  of 
the  struggle. 

Concrete  Economic  Results  of  War  Contract  Era 

It  now  seems  in  order  to  try  to  summarize  some  of  the 
more  specific  economic  results  arising  from  the  contractual 
experiences  of  the  war  era.  Much  might  be  brought  to  light 
regarding  war  contracts  as  a  source  of  contribution  to  na- 
tional wealth,  as  a  prolific  source  in  the  rise  of  a  new  class  of 
millionaires  and  as  a  period  In  which  the  purchasing  power  of 
millions  of  wage  earners  was  swollen  beyond  the  dreams  of 
the  most  imaginative.  This  increment  of  wage  earning  pur- 
chasing power  took  Its  rise  in  the  American  war  contracts 
with  European  countries,  resulting  in  the  inflation  of  wage 
scales  ostensibly  in  keeping  with  the  exaggerated  ideas  of 
contractors'  profits.  When,  owing  to  changed  economic  con- 
ditions In  cost  of  production,  many  of  these  profits  disap- 
peared, wages  did  not,  however,  come  down  but  held  their 
high  ground  or  went  on  advancing.  Theirs  was  the  harvest 
of  a  scarcity  market  in  an  emergency  era. 

This  sudden  Increment  In  buying  power  made  Itself  felt 


344  GOVERNMENT   WAR   CONTRACTS 

not  only  in  the  price  levels  of  necessities  but  equally  so  in 
luxury  products.  The  arrival  of  a  new  class  of  purchasers 
for  consumption  in  the  retail  markets  reacted  on  wholesaling, 
thence  on  the  jobbing  trades  and  ultimately  but  promptly 
back  to  the  mills.  Urgency  of  demand  for  early  delivery 
made  every  link  in  this  series  of  price  factors  more  and  more 
independent  of  conservative  standards  of  value.  Mills  kept 
putting  up  prices  as  bidders  rivaled  each  other  for  supplies. 
To  make  matters  w^orse,  war  contract  priorities  reduced  the 
number  of  concerns  free  to  make  commercial  goods,  thus 
further  intensifying  the  demands  and  enhancing  the  profits 
of  the  manufacturers.  Under  these  circumstances  nothing 
short  of  the  firm  hand  of  commandeering  authority  was  able 
in  some  instances  to  get  government  w^ork  done.  In  order 
not  to  restrict  the  sources  of  profits  more  than  necessary  and 
thus  unduly  narrow  the  basis  of  excess  profits  revenues,  orders 
were  often  apportioned  as  equitably  as  practicable  among 
the  members  of  a  given  industry.  This  equating  adjustment 
of  public  and  private  interests  was  one  of  the  better  results 
from  the  relations  of  government  to  private  enterprise  during 
the  war.  Much  of  the  credit  for  the  measure  of  success  in 
this  was  due  to  the  industrial  and  commercial  organizations 
cooperating  with  the  government,  either  locally  or  through 
the  War  Industries  Board. 

Still  more  specific  results  are  the  following: 

.  Dejects  of  Bureau  System  Disclosed 

The  war  disclosed  the  defects  of  the  several  bureaus  of  the 
War  Department  as  contracting  units.  Least  of  all  of  these 
defects  appeared  in  the  Engineering  Corps,  whose  practices 
and  traditions  kept  it  in  touch  with  business  life  in  peace. 
But  all  of  the  bureaus  suffered  from  competition  among 
themselves  in  the  same  markets  and  from  the  extremely 
limited  range  of  competitive  bidding  into  which  prewar  con- 
tract awards  had  fallen.  Under  this  serious  handicap  they 
passed  into  the  war  time  market  with  grievous  results  as  to 
costs.     To  these  the  early  breakdown  of  the  Quartermaster 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  345 

General's  contracting  service  was  partly  if  not  mainly  due. 
Its  prompt  reorganization  in  line  with  more  effective  methods 
of  war  supply  eliminated  much  senseless  competition  among 
governmental  purchasing  agencies. 

Principles  of  Price  Control  Developed 

Price  control  on  the  part  of  the  government  comprises  a 
most  valuable  contribution  to  economic  experience.  Prob- 
ably the  best  results  were  exemplified  in  the  navy,  where  the 
principle  of  fair  prices  and  reasonable  profit  found  embodi- 
ment in  contractual  practice  to  a  remarkable  extent.  The 
Navy  Department  bureaus,  especially  the  Bureau  of  Supply 
and  Accounts,  demonstrated  what  might  be  done  with  an 
equally  well  equipped  and  effectively  managed  staff  of  pur- 
chasing agents,  commodity  specialists  and  cost  determining 
accountants.  In  the  reorganized  Quartermaster  and  Ord- 
nance ofifices,  as  the  Division  of  Supply  and  Storage  under 
the  General  Staff,  much  equally  good  purchasing  was  accom- 
plished. The  principles  of  control,  both  statutory  and  admin- 
istrative, as  treated  in  Part  I,  indicate  that  the  govern- 
ment before  the  war  ended,  during  most  of  191 8,  had  a  much 
firmer  grasp  of  its  supply  problems  than  in  any  previous  war  in 
which  the  United  States  had  a  part.  Congress  was  quicker 
to  detect  wrong  systems,  wasteful  methods  of  administration ; 
and  the  Executive  sooner  or  later  adjusted  its  faulty  practices 
to  better  standards.  The  protective  services  of  advisory 
agencies,  of  the  food  and  fuel  control  and  similar  means  of 
ensuring  some  regard  for  reasonableness  in  price  fixing  were 
of  untold  value  in  keeping  down  contracting  costs. 

Abiding  Faith  in  Competitive  Awards 

The  war  time  experience  with  forms  of  contracts  proved 
the  abiding  faith  of  the  government  in  the  wisdom  of  com- 
petitive bidding  as  a  means  of  arriving  at  an  approximately 
fair  level  of  costs.  The  engineering  profession's  utilization 
of  the  cost-plus  contracts  for  public  awards  may  have  a  lim- 
ited field  in  experimental,  emergency  and  pioneering  lines,  but 


346  GOVERNMENT   WAR    CONTRACTS 

certainly  it  has  not  found  favor  in  Congressional  quarters. 
Possibly  the  emergency  work  contracts  of  the  camp  and 
cantonment  type  may  have  justified  themselves.  But  noth- 
ing that  the  government  has  done,  of  which  the  general  public 
has  had  close  cognizance,  had  at  first  a  more  demoralizing 
effect  on  the  confidence  of  employes  or  employers  in  govern- 
ment business  ability  than  these  very  contracts.  In  the  judg- 
ment of  many,  these  and  the  shipbuilding  and  aircraft  con- 
tracts, owing  to  their  wasteful  execution  and  to  excessive 
costs,  were  among  the  most  potent  factors  in  promoting 
w^age  exactions,  price  inflation  and  speculative  trading  at  the 
expense  of  the  government  and  of  the  normal  cost  of  living. 

Accountancy  Gives  Scientific  Character  to  Contract  Control 

One  unique  result  of  war  contracting  is  the  enhanced  im- 
portance given  to  the  service  of  accountancy  in  safeguarding 
public  cost  keeping,  contracting  and  claims  settlements. 
Government  control  over  costs  of  work  being  done  developed 
enormously  on  this  technical  side  of  its  equipment.  There 
is  still  limited  service  for  the  old  line  specialist;  but  his  work 
is  being  expanded  into  the  staff  and  line  accounting  which 
gives  the  central  office  better  control  over  production  on 
public  account,  regardless  of  where  it  is  carried  on.  It  brings 
to  the  service  of  the  official  inspection  force  a  power  of  super- 
vision over  processes  not  hitherto  available.  In  short,  the 
more  direct  use  of  cost  accounting  and  organization  of  pro- 
duction on  such  lines  has  imparted  a  distinctly  more  scientific 
character  to  the  contract  relations  of  government  to  industry. 

Reflex  Action  of  Standardization  on  Industry 

Standardization  has  gained  vastly  by  reason  of  the  work  of 
war  contracting.  The  specifications  of  the  formal  contract 
have  often  introduced  for  the  first  time  exact  standards  of 
measurement  into  the  industrial  processes  of  manufacturing 
concerns.  Take  this  single  case.  A  small  foundry  in  Con- 
necticut took  to  making  six-inch  mortar  shells  for  the  Ord- 
nance Corps,  and  soon  learned  the  lesson  of  ordnance  exact- 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  347 

ness.  Before  that  It  had  been  making  bed  casters  in  which 
there  were  124  separate  parts.  After  learning  the  secret  of 
standardizing  work  from  the  war  contracts  it  reduced  these 
parts  to  twelve.  It  got  back  to  commercial  work  on  this  new 
basis  within  fifteen  days  after  the  armistice,  eager  to  test  the 
possibilities  of  standardizing  methods  in  cost  reduction. 

Thus  the  army  and  the  navy  have  taught  the  civilian  manu- 
facturer many  a  secret  of  competitive  power  in  the  emergency 
work  of  the  w^ar.  This  result  leads  one  to  suggest  that  in  the 
cooperation  of  the  technical  with  the  practical  in  our  indus- 
trial life  there  are  untold  potentialities  of  which  the  war 
work  has  given  but  a  hint.  The  standardized  contract  is 
but  another  gain  in  this  direction. 

Probable   Economic   Outcome   of  Shipbuilding   Program 

It  is  almost  too  soon  to  assay  the  gains  or  losses  from  our 
shipbuilding  experience.  Something  will  depend  on  the  policy 
adopted  for  control  and  working  standards  in  the  field  of 
operation.  But  it  is  doubtful  whether  the  hopes  of  mass  pro- 
duction on  the  fabricated  plan  of  standardized  ships  will  be 
realized,  now  that  the  pressure  for  tonnage  is  removed.  The 
fields  of  service  are  so  varied  in  their  bearing  on  types  and 
methods  of  construction,  and  the  adaptations  of  tonnage  to 
these  specific  uses  are  so  persistent  in  maritime  competition, 
as  to  emphasize  specialization  rather  than  standardization  as 
the  thing  of  the  future.  Some  of  the  most  advanced  authori- 
ties regard  standardized  ships  as  a  thing  of  the  past  in  the 
race  for  maritime  mastery.  It  is  still  too  much  of  an  open 
question  to  decide  how  much  of  our  shipbuilding  experience 
in  the  war  program  extended  is  asset  and  how  much  liability. 
It  is  quite  probable  that  the  excessive  costs  of  production  in 
these  government  yards  may  in  due  time  under  fabulously 
high  freight  rates  run  up  their  earnings  of  operation  to  a  point 
of  profits  that  will  wipe  out  the  billion  or  more  dollars  which 
was  expected  to  be  charged  off  in  the  final  financing.  This 
view  is  based  on  the  official  announcement  that  the  net  earn- 
ings of  the  Quistconk — the  first  Hog  Island  ship  to  be  accepted 


348  GOVERNMENT    WAR    CONTRACTS 

by  the  go\'ernment — on  a  ninety-two-day  voyage  earned 
$461,161;  the  estimated  cost  of  this  ship  was  $1,100,000. 
Up  to  October  8,  1919,  scarcely  a  year  after  war  ceased,  this 
yard  deHvered  its  fiftieth  ship.  All  of  these  were  promptly 
put  into  operation  and  from  the  date  of  commission  have  been 
earning  these  exceptional  profits.  Other  fabricating  yards 
have  been  doing  almost  if  not  quite  as  well  in  enhancing  the 
operative  earning  power  of  the  Shipping  Board  on  its  govern- 
ment built  tonnage.  In  wooden  shipbuilding  results  were  a 
disappointment  through  no  defect  in  the  idea. 

Aircraft  Production  in  Army  and  Navy 

Results  in  the  aircraft  production  contracting  have  to  be 
judged  mainly  from  the  military  viewpoint.  If  the  moral 
effect  on  the  enemy  of  the  extensively  advertised  production 
on  an  enormous  scale  was  such  as  to  shorten  the  conflict  by 
a  single  month,  then  the  country's  thanks  are  due  to  the  pub- 
licity end  of  the  aircraft  program.  If  the  war  ended  only 
two  weeks  earlier  on  its  account,  it  canceled  more  than  half 
of  the  appropriated  cost  of  $640,000,000  in  191 8.  Otherwise 
the  results  must  be  valued  in  terms  of  the  scrap  heap  and  sal- 
vage account  rather  than  by  any  contribution  of  a  positive 
character  to  economic  experience.  Even  the  much  exploited 
Liberty  motor,  unsupported  by  official  backing,  sinks  to  its 
place  as  an  emergency  product  with  all  the  disadvantages  of 
the  conditions  and  circumstances  of  its  origin.  The  aircraft 
industry  as  such  derived  mainly  negative  gains  from  the  gov- 
ernmental program  of  the  War  Department. 

The  results  are  quite  different  in  the  navy  where  aeronauti- 
cal manufacturing  by  private  concerns  was  encouraged  in 
every  reasonable  way.^  By  utilizing  these  facilities  from  the 
start,  and  standing  by  them  in  realizing  the  high  production 
schedule  of  191 8,  while  developing  its  own  facilities  concur- 
rently, the  navy  by  the  middle  of  191 8  was  in  position  to 
transfer  certain  producing  concerns  to  the  belated  army  work. 

^  Report  of  Chief  of  Bureau  of  Construction  and  Repairs,  Navy  Department, 
1918;  on  airplane  production,  pp.  13-14;  on  spruce  production,  pp.  15-16. 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  349 

In  the  navy's  airplane  spruce  production,  it  secured  coopera- 
tion of  the  most  desirable  kind  from  the  start,  while  the  army 
methods  of  handling  this  part  of  its  aircraft  program  resulted 
in  dissension  among  the  lumber  producing  agencies,  thus 
vastly  enhancing  the  expense  in  creating  added  facilities 
while  setting  the  existing  ones  at  loggerheads. 

Housing  Operations  on  the   Whole  Justified 

In  the  housing  operations  during  the  war  the  government 
sought  to  reduce  the  appalling  labor  turnover  at  its  various 
producing  plants,  by  making  the  conditions  of  living  more 
tolerable.  In  stabilizing  the  labor  conditions  the  Housing 
Bureau  and  Corporation  of  the  Department  of  Labor  worked 
on  right  lines  and  followed  sound  methods  and  policies  in 
the  main.  It  produced  results  of  great  economic  service  in 
munition  production  especially.  It  differed  in  the  end  with 
its  Congressional  investigators  on  the  question  of  whether  to 
complete  or  to  cancel  certain  projects  incomplete  when  the 
war  ended.  On  the  whole  the  Housing  Corporation  showed 
the  better  business  judgment  on  questions  of  policy  of  sale  of 
properties  in  unfinished  condition  especially  where  the  local 
demand  for  housing  was  admittedly  in  excess  of  the  supply. 
Congress,  however,  bent  on  reducing  expenses,  decided  ad- 
versely; and  was  probably  too  much  influenced  by  results  as 
seen  in  the  Plaza  project  at  the  national  capital. 

Government  Brought  New  Standards  to  Industry 

In  nothing  did  the  American  manufacturer  appear  to  better 
advantage  than  in  his  prompt  response  to  the  proposal  to 
adapt  his  working  forces  and  his  equipment  to  the  needs  of  the 
war.  This  was  on  a  par  with  the  attitude  of  the  engineering 
and  other  professions.  By  this  means  the  industrial  capacity 
of  the  country  was  vastly  increased  in  any  given  direction. 
Ordnance  experts  sent  out  among  contracting  plants  assisted 
greatly  in  speeding  up,  in  reaching  quantity  production  and 
in  anticipating  the  contract  delivery  schedule.  As  a  result  the 
close  of  the  war  left  us  with  a  large  increase  in  the  number  of 


350  GOVERNMENT    WAR    CONTRACTS 

Specially  skilled  workmen  in  the  finer  lines  on  metal  working 
and  instruments  of  precision.  The  Navy  Ordnance  Bureau 
makes  special  mention  of  a  typical  instance  of  this  in  a  Muske- 
gon firm  in  the  making  of  gun  sights.^  Of  such  there  were 
thousands  unnoted. 

Another  remarkably  good  record  was  made  in  the  industrial 
field  in  the  readiness  with  which  the  manufacturing  plants  after 
the  armistice  took  up  their  commercial  work.  Many  of  these 
war  working  plants  had  learned  to  do  higher  grades  of  manu- 
facturing by  virtue  of  their  government  contracts.  More  of 
them  learned  for  the  first  time  the  economy  of  standardiza- 
tion. They  therefore  took  advantage  of  this  experience  in 
governmental  work,  by  entering  upon  more  lucrative  kinds  of 
commercial  contracts.  This  entrance  into  a  newer  field  upon 
return  to  peace  was  for  industry  one  of  the  most  valuable  by- 
products of  the  war.  In  a  series  of  reports  on  the  demobiliza- 
tion of  industry,  Captain  William  A.  Du  Pay  published  the 
results  of  an  inquiry  among  munition  plants,  following  the 
termination  of  contracts. ^  He  found  that  at  the  end  of  two 
months  after  the  armistice  there  was  only  a  shadow  of  the  war 
time  production  left  in  some  lines.  Gradual  cancelations  had 
averted  disaster. 

Remarkably  Rapid  Transition  to  Peace 

Under  the  general  scheme  of  terminating  and  settling  con- 
tracts the  assets  tied  up  were  much  more  promptly  liquidated 
than  had  been  expected.  By  the  army's  plan,  it  will  be  re- 
called, district  claims  boards  for  ordnance  contract  settlement 
were  established,  consisting  of  the  district  officer,  a  civilian,  the 
civilian  representative  of  the  War  Industries  Board  and  three 
army  officers.  For  the  purchase  and  storage  (quartermaster) 
the  zone  supply  officer  established  a  board  of  contract  review 
composed  of  army  officers  and  one  civilian.  When  these 
agencies  had  reached  an  agreement  of  settlement  with  the 
contractor,  the  results  went  before  the  Board  of  Contract  Ad- 

^  Report  of  1918,  p.  6. 

"^Philadelphia  Ledger,  Business  Section,  January  and  February,  1919,  especially 
Articles  II  (January  22>),  III  (January  25),  IV,  V,  and  VII  (February  4,  1919). 


LIQUIDATION,    CANCELATION    AND   ADJUSTMENT  35 1 

justment  at  Washington  for  approval  and  prompt  payment. 
Failure  of  parties  to  agree  resulted  in  75  per  cent  payment 
subject  to  subsequent  adjudication  in  the  Court  of  Claims.  By 
this  method  the  "frozen  assets"  due  to  the  sudden  stopping  of 
war  were  released  within  ninety  days  of  November  11 ,  in  the 
great  majority  of  cases.  Thus  the  stupendous  commitments 
aggregating  $12,000,000,000  at  that  date  were  mainly  melted 
into  commercial  resources  at  the  service  of  peace  time  industry. 
In  the  item  of  motors,  for  instance,  the  cancelations  were 
$271,000,000,  in  the  Purchase  and  Storage  orders  of  over  a 
billion  dollars.  Ordnance  and  Aircraft  had  $10,000,000,- 
000  of  contracts  pending.  During  the  first  six  weeks  $3,- 
000,000,000  of  these  contracts  were  canceled.  At  the  end  of 
two  months  probably  half  of  the  contracts  were  still  running, 
but  rapidly  tapering  down  to  the  vanishing  point.  Such  was 
the  case  with  small  arms.  The  industries  which  had  served 
well  in  war  were  thus  not  hurried  back  to  peace  conditions, 
with  the  abnormally  high  prices  for  raw  materials  and  a  labor 
situation  that  required  careful  handling. 

The  clearing  up  following  the  war  covered  a  most  extensive 
field  of  financial,  industrial  and  commercial  readjustment.  In 
liquidating  the  contract  work  the  policy  of  a  gradual  release  of 
labor  and  industry  justified  itself  by  results.  That  this  was 
accomplished  without  so  much  as  developing  an  unemploy- 
ment problem  of  any  significant  proportions  is  in  itself  a 
credit  to  the  government,  to  contracting  concerns  and  to  the 
country  in  general.  In  the  liquidation  of  the  material  re- 
sources involved,  the  government  realized  a  cash  price  of 
$400,000,000  for  its  war  assets  in  France,  or  almost  as  much  as 
the  Liquidation  Commission  asked  for  it.  This  sum  should  be 
compared  with  that  of  $1,839,787,989  as  the  total  amount  ex- 
pended by  the  American  Expeditionary  Forces  abroad  between 
April  6,  1917,  and  June  i,  1918.  The  process  of  salvaging  is 
still  going  on  in  domestic  quarters.  And  though  there  have 
been  flagrant  cases  of  delinquency  in  the  custody  of  war 
property,  the  main  trend  of  settlement  has  exceeded  the  rate 
of  progress  anticipated   by  the  business  community.     The 


352  GOVERNMENT    WAR    CONTRACTS 

methods  of  adjustment  as  carried  out  by  the  district  claims 
boards  and  their  staffs  thus  far,  with  some  signal  exceptions 
due  to  contractual  greed  or  official  incompetence,  have  been  a 
credit  to  those  who  planned  and  carried  out  the  program. 

With  this  work  completed,  the  war  driven  organizations  of 
economic  life  turn  full  face-about  toward  the  demands  of 
peace.  The  slowing  up  through  which  the  nation  is  passing  in 
its  producing  and  commercial  efforts  is  akin  to  the  attitude  of 
a  patient  recovering  from  a  fever.  But  this  giant  nation  is 
none  the  less  on  the  sure  road  to  recovery  from  the  many  mis- 
takes to  the  surer  masteries  of  a  future  fuller  than  ever  of  the 
possibilities  of  economic  service  of  itself  and  of  its  fellow 
peoples. 


INDEX 


Adjutant  General,  expenditures  of,  9,  35. 

Adjustment.     See  Liquidation. 

Advisory  Commission  (Council  of  National 
Defense):  creation  of,  6,  28;  nature  and  di- 
vision of,  52-54,  58. 

Aero  Club  of  America,  250. 

Agency  compensation  system,  criticism  of,  211. 

Agency  contracts:  nature  and  use  of,  33,  36; 
employment  of,  by  Emergency  Fleet  Cor- 
poration, 184;  principle  of  payment  in,  186, 
i88,  190,  195;  fiduciary  position  of  agency 
contractors,  337. 

Aircraft  production:  vii,  28;  commandeering  of 
airplane  spruce,  49-50;  comparison  of,  in 
army  and  navy,  135;  disappointing  results  of, 
231;  isolation  of  war  authorities  from  aircraft 
industry,  232;  extent  of  production  to  date  of 
armistice,  235;  failure  of  Deeds-Coffin  pro- 
gram, 236;  cost-plus  contracts  for  Liberty 
engines,  237;  analysis  of  Liberty  engine 
builders'  profits,  239;  unfair  profits  of  plane 
contractors  on  bogey  cost  basis,  244;  a  fair 
basic  price  by  arbitration,  245;  treatment  of 
aircraft  industry  contractors,  246;  causes  of 
aircraft  failure,  250-252;  appropriations  and 
commitments  for  aviation,  252;  conditions 
surrounding  airplane  spruce-fir  contracts,  253 ; 
first  and  second  stages  in  airplane  spruce 
production,  256-257;  contracting  results  in 
army  and  navy,  348. 

Aircraft  Production  Board,  50,  235,  249-250, 
254,  256-257. 

Allocation  contracts:  nature  and  use  of,  32,  44, 
45;  allocation  of  contracts  by  Committee  on 
Supplies,  55;  application  of  allocating  princi- 
ple in  war  contracting,  56,  loi,  150;  transi- 
tion to  allocation  of  contracts  in  navy,  156; 
comparative  extent  of  allocation  and  compe- 
tition in  navy,  157-158. 

American  Federation  of  Labor,  89. 

American  International  Shipbuilding  Corpora- 
tion: agency  contracts  with,  37,  183-184; 
control  of  labor  market,  133;  investment  in, 
by  government,  182;  contractors'  fees,  186- 
187,  212,  214-216,  218;  tonnage  delivered, 
196;  tonnage  contracted  for,  209-210,  216; 
subcontracting,  220-221,  225;  cost  accounting, 
222-224;  housing,  267-268;  answer  to  charge 
of  mismanagement,  336-337. 

Ammunition:  expenditures  for,  96;  production 
of,  112,  121. 

Anacortes  shipyard,  229. 

Army  Commodity  Committees,  21,  25,  71. 

Attorney  General,  The,  22,  222,  231,  334. 

Australian  War  Precaution  Act,  49. 

Automatic  rifles,  expenditures  for,  96. 

Aviation.     See  Aircraft  production. 

Baldwin  Locomotive  Works,  46. 

Balfour,  Arthur  James,  205. 

Balfour  Mission,  175. 

Bethlehem  Shipbuilding  Corporation,  264. 

Board  of  Contract  Adjustment,  309,  314-315. 
350. 

Board  of  Contract  Review,  71,  309-310. 

Borah  Report.  341. 

Bowles,  Admiral  F.  T.,  188,  217,  219. 

Brill  Company,  J.  G.,  46. 

Bristol  airplanes,  247-248. 

Bristol     shipyard.     See     Merchant     Ship- 
building Corporation. 

Bureau  claims  boards,  314-315. 


Bureau  of  Industrial  Housing  and  Transporta- 
tion (Department  of  Labor),  270,  283-285. 

Bureau  system  of  contracting:  failure  of,  27;  in 
Engineer  Corps,  334. 

Camps  and  cantonments:  costs,  75,  86;  awarded 
under  cost-plus  contracts,  75,  88,  93;  govern- 
ment supervision  over  construction,  76;  rea- 
sons for  adoption  of  cost  plus  percentage 
fee  contract,  81-82;  points  of  mutual  appeal 
in  emergency  building  contracts,  82;  deter- 
mination of  contractor's  fee,  84;  schedule  of 
cost-plus  fees,  85;  selection  of  contractors, 
86-88,  90-91;  official  estimate  of  contractual 
results,  92;  theory  of  the  graduated  percent- 
age fee  contract.  95. 

Cancelation.     See  Liquidation. 

Capital  Issues  Committee,  338. 

Capps,  Admiral  W.  L.,  185,  224-225. 

Caproni  airplanes,  246,  248. 

Chartering  Committee  (U.  S.  Shipping  Board), 
202. 

Chemical  Warfare  Service,  expenditures  of,  9. 

Chester  Shipbuilding  Company,  218. 

Claims  Staff  Branch,  316,  324. 

Clark,  F.  Huntington.  227. 

Classification  of  contracts,  32-33. 

Coffin,  Howard  E.,  50,  236,  248. 

Commandeering  (requisitioning),  7,  33;  dis- 
advantages of,  40;  stigma  attached  to,  42; 
problem  of  fair  and  just  compensation,  42; 
legality  of  commandeering  authority,  43; 
form  of  navy's  mandatory  contract  or  order, 
44;  bargaining  value  of  authority  to  comman- 
deer, 45-47;  conditions  which  apparently 
justify,  48;  of  west  coast  spruce  production, 
49;  of  the  wool  supply,  70,  150;  amount  spent 
for  commandeered  shipping  tonnage,  169; 
powers  of  U.  S.  Shipping  Board,  181,  184; 
ships  requisitioned,  198;  contractual  arrange- 
ments for  requisitioned  ships,  200;  control  of 
chartering  nonrequisitioned  ships,  201;  re- 
quisitioning of  incomplete  ships,  203;  as  an 
emergency  shipyard  policy,  206. 

Commerce,  Department  of,  38. 

Commissioner  of  Internal  Revenue,  341. 

Committee  on  Supplies  (Council  of  National 
Defense),  negotiation  of  contracts  by,  28;  pur- 
chasing of  clothing  and  equipage  taken  over 
by,  30;  contracting  record  of,  54;  allocation 
of  contracts  by,  55;  testimony  of  chairman 
of,  on  wool  and  cotton  production,  57;  weak- 
ness and  overthrow  of  policy,  58,  65. 

Compensation  Board  (Navy  Department),  149. 

Competitive  awards  (contracts) :  prewar  use  of, 
by  army,  31;  application  of,  32-33,  40;  wis- 
dom of.  proven,  345. 

Competitive  bidding,  5;  competitive  procedure 
obligatory  in  ordinary'  times,  13;  basic  idea 
of,  21;  interdepartmental,  29;  application  of, 
by  Committee  on  Supplies  in  purchase  of 
shoes  and  leather,  55;  in  camp  construction, 
79;  disappearance  of,  in  Ordnance  Office,  loi, 
150,  154,  158;  application  of ,  by  Housing  Cor- 
poration, 271,335- 

Comptroller  of  the  Treasury',  19,  21,  31,  290,  310. 

Connick.  Harris  G.  H.,  213-216,  223. 

Construction  Division.  See  Emergency  Con- 
struction Division. 

Cost  accounting,  30,  39.  ii7. 

Cost  control,  116,  130,  136;  navy's  cardinal 
principle  of,  144,  279,  281. 


353 


354 


INDEX 


Cost  Engineering  Section  (U.  S.  Housing  Cor- 
poration), 278,  281. 

Cost-Plus  contracts,  2 1 ;  legislation  and  features 
of,  32,  36;  most  extensive  application  of, 
37;  elements  necessitating  adoption  of,  38; 
competitive,  cost-plus  and  commandeering 
contracts,  40;  extensive  use  of,  by  Ordnance 
Department,  45-46,  ss,  107;  rejection  of,  as 
a  result  of  reorganization  of  supply  system, 
70-73;  profits  under,  75,  84;  reasons  for 
adoption  in  emergency  construction  work, 
81-82;  determination  of  fees,  84;  schedule  of 
cost-plus  fees  for  emergency  building  con- 
tracts, 85;  criticisms  of,  88;  adoption  of,  for 
emergency  construction  work,  93;  theory  of 
the  graduated  percentage  fee  contract,  95; 
four  essential  factors  in,  118;  in  rifle  produc- 
tion, 122,  125,  131;  prewar  use  of,  by  navy, 
137;  a  war  time  expedient,  140;  in  shipbuild- 
ing, 141,  148-150,  165,  183-184,  193-194; 
adoption  by  naval  authorities,  144-145;  cost 
and  compensation  provisions,  146-147;  for 
Liberty  engines,  237;  aircraft  production, 
243.  256-258,  268,  276;  settlement  of,  306. 

Council  of  National  Defense,  vi;  creation  of, 
6,  8,  27;  assumption  of  virtual  role  of  war 
contracting,  28,  29-31,  37-38,42;  duty  and 
character  of,  52;  contracting  methods  of 
advisory  committees  of,  53-54,  58;  position 
of,  in  principle  and  practice,  59-60;  criticisms 
of,  61,  6s,  69,  78,  86-87,  92,  102,  152,  227, 
257,  263,  342. 

Court  of  Claims,  5,  35,  311. 

Crowell,  Benedict,  131,  3 10. 

Crozier,  General  William,  35,  67,  99,  102,  128, 
130. 

Curtiss  Aeroplane  and  Motor  Corporation,  246. 

Dayton-Wright  Airplane  Company,   223,   237, 

244-246. 
Deeds,  Colonel  E.  E.,  239,  256. 
Definition  of  costs,  117. 
De  Haviland  airplanes,  245-246. 
Denman,  William,  176,  205,  214,  223,  228. 
Dent  Act  (Law),  validation  of  informal  orders 

or  contracts  by,  31,  289-290,  311,  314,  342, 
Department  of  Commerce,  38. 
Department    of    Interior,    appropriations    for, 

lo-ii,  19. 
Department  of  Justice,  296. 
Department  of  Labor,  10,  278. 
Department  of  State,  175. 

Destroyer  building,  cost-plus  contracts  in,  141. 
Disque,  Colonel,  258,  260. 
District  Ordnance  Office,  no. 
District  War  Claims  Boards,  vii,  315;  features 

of  hearings  of,  316,  320. 
Division    of    Purchase,     Storage     and     Traffic 

(Quartermaster  Corps),  10,  21;  consolidation 

of  war  purchasing  agencies  under,  27,  32,  63; 

supply  circulars  issued  by,  66-67,  70-71,  105, 

289,  298;  organization  of  sales  division  under, 

300-301,307,310. 
Douglas  fir,  254-255. 
Du  Pay,  Captain  William,  350. 

"Eagles"  (patrol  boats) ,  153. 

Eddystone  rifle  plant,  130;  record  of,  132,  134, 
310. 

Eidlitz,  Otto  M.,  263-264,  269,  283. 

Eisenman,  Charles,  S5-57. 

Emergency  building  contracts,  schedule  of 
cost-plus  fees  for,  85. 

Emergency  Construction  Committee  (Council 
of  National  Defense),  37,  87,  89,  92,  94,  273, 
282. 

Emergency  Construction  Division  (Quartermas- 
ter Corps),  76,  87,  8i;  three  fundamental 
lines  followed  by,  87,  92,  94.  I43.  273;  per- 
centage of  profits  allowed  by,  277,  280. 


Emergency  Deficiency  Act,  264. 

Emergency  Fleet  Corporation,  vii,  37,  78, 
168-169,  171 ;  scope  of  contracting  of,  172-173; 
construction  problems  of,  174;  character  of 
contracting  problem  of,  175;  tonnage  con- 
tracted for,  176-177;  construction  activities 
and  deliveries  of,  178;  authorizations,  com- 
mitments and  expenditures  of,  178-179; 
major  lines  of  contract  of,  181;  varying 
character  of  contractual  arrangements  of, 
183;  four  types  of  awards  by,  184-185,  187; 
lump  sum  contracts  in  80  per  cent  of  awards, 
188,  190;  date  of  first  contract  of,  191-193; 
policy  of,  toward  contract  shipyards,  195-197; 
ships  requisitioned  by,  198;  number  and 
tonnage  of  incomplete  ships  requisitioned  by, 
203-205,  208,  210,  213-217;  expenditures  of, 
for  plant  construction,  220-226;  policy  of,  as 
regards  wooden  ships,  229-230,  254,  264; 
extent  and  results  of  shipyard  housing  under, 
265;  commitments  of,  for  housing  shipyard 
workers,  266-267,  336. 

Emergency  Shipping  Act,  172. 

Enfield  rifle,  122-124,  126,  130. 

Engineer  Corps:  expenditures  of,  9;  prewar  use 
of  procurement  orders  by,  31,  33,  63,  115,  313; 
general  method  of  procurement  in,  63; 
consolidation  of  purchases  of,  70;  high  con- 
tracting standard  of,  72;  increase  in  personnel 
of,  73,  81.  92,  152;  recruiting  efforts  of,  258; 
defects  of  bureau  contracting  system  least 
apparent  in.  334. 

Engineering  News-Record,  279 

Eustis,  F.  A.,  227. 

Federal  Reserve  Bank,  vii. 

Federal  Reserve  Board,  339. 

Federal  Trade  Commission,  38,  138,  15S,  IS8, 
243.  273. 

Fees:  how  determined  under  cost-plus  con- 
tracts, 84;  under  commandeering  contracts, 
42;  in  shipbuilding  plants,  218. 

Fee  system.     See  Cost-plus  contracts. 

Ferris  type  of  wooden  ships,  227,  228. 

Finance,  Director  of,  9,  288. 

Fisher  Body  Corporation,  237. 

Food  and  Fuel  Administration,  49,  69,  158, 

Food  and  Fuel  Control  Act.  15. 

Food  Purchasing  Board,  158. 

Ford  Motor  Company,  153,  238. 

Forms  of  contract:  evolution  of,  31;  factors 
affecting,  36. 

Fort  Benjamin  Harrison,  81. 

Fort  Myer,  81. 

Foster,  Major  Clair,  338. 

Fuel  and  Food  Control  Act,  15. 

Fuller  Company,  G.  A.,  269. 

Funston,  General  Frederick,  232. 

General  Motors  Company,  238,  241. 

General  Munitions  Board,  25,  58,  87,  loi,  128, 
273. 

Goethals,  General  George  W.,  29-30,  32,  47, 
68-70,  180,  184-185,  203,  213-21S,  223-225, 
228,  290-291,  310. 

Government  contracting:  general  features  of 
peace  time  contracting,  4;  basic  factors  in 
war  time  contracting,  6;  volume  of,  8;  dy- 
namic import  and  scope  of  war  contracts,  10; 
statutory  principles  of  procedure,  13;  theory 
of  government  war  contracting,  18;  adminis- 
trative principles  of  procedure,  19;  failure  of 
isolated  bureau  system,  27;  evolution  of 
contract  forms  as  used  by  army  and  navy,  31; 
classification  of  war  time  contracts,  32-33; 
factors  affecting  forms  of  contracts,  36; 
interdepartmental  efforts  to  standardize 
contracts,  37;  competitive,  cost-plus  and 
commandeering  contracts,  40;  schedule  of 
cost-plus  fees  for  emergency  building  con- 


INDEX 


355 


tracts,  8s ;  theory  of  the  graduated  percentage 
fee  contract,  95;  specifications  and  provisions 
in  standard  contracts,  162;  problem  of  set- 
tling unfinished  contracts,  288;  termination  of 
contracts  and  orders  in  public  interest.  307; 
supplemental  contracts  for  settling  claims, 
308;  summary  of  features  in  contract  adjust- 
ment, 309;  war  time  status  of  government 
contract,  324:  theory  of  the  contractor's 
war  time  position,  33S;  fiduciary  position  of 
agency  contractors,  337 ;  war  contracts  had  first 
call  on  capital,  338;  federal  taxes  on  war 
contract  profits,  340;  Congressional  criticism 
and  war  contracts,  341;  concrete  economic 
results  of  war  contract  era,  343;  defects  of 
bureau  system  disclosed,  344. 
Grant-Smith-Porter-Guthrie  Company,  185. 

Hog  Island.  See  American  International  Ship- 
building Corporation. 

Housing  Corporation.  See  United  States 
Housing  Corporation. 

Housing  program:  origin  and  development  of, 
263;  extent  and  results  of  shipyard  housing, 
265,  267,  336;  housing  arrangements  at  Hog 
Island,  267;  contractors'  fees  in  projects  of 
Housing  Corporation.  268;  method  of  select- 
ing contractors,  270;  subcontracting,  272; 
materials,  prices  and  wages  in  housing  con- 
tracts, 273-274;  effect  of  armistice  on  housing 
policy,  284-285;  housing  operations  on  the 
whole  justified,  349-  See  also  United  States 
Housing  Corporation,  operations  of. 

Hughes,  Ex-Justice  Charles  E.,  231,  240. 

Hurley,  Edward  N.,  185. 

lUinois  Manufacturers'  Association.  309. 
Industrial  Relations  Committee,  274. 
Inspection  Division  (Ordnance  Office),  121. 
Interdepartmental  Conference,  38,  40. 
Interior  Department,  appropriations  for,  lo-ll, 

19. 
International  Ordnance  Agreement,  97,  106. 

Jobbers,  23. 

Judge  Advocate   General,   expenditures  of,   9, 

99. 
Justice,  Department  of,  296. 

Kernan,  Colonel  Francis  J.,  14. 
King,  Senator  \V.  H.,  341. 

Labor.  Department  of,  10,  278. 

Lake  Pleasant  Railroad  Contract,  261. 

Lake  Torpedo  Boat  Company,  14S,  159,  168. 

Landis,  Colonel,  53. 

Leadbetter,  Major,  257-258. 

Legislation:  Australian  War  Precaution  Act,  49, 
Overman  Act,  7,  16,  18;  Food  and  Fuel  Con- 
trol Act,  is;  Dent  Act,  31,  289-290,311,314, 
342;  Munitions  Manufacturers'  Tax  Act,  189, 
340;  Emergency  Deficiency  Act,  264;  Emer- 
gency Shipping  Act,  169,  171-172;  National 
Defense  xA.ct,  6;  Poindexter  bill,  32;  Revenue 

Act,  341- 

Liberty  Engines  (motors),  70,  124;  cost-plus 
contracts  for,  237;  awards  and  monthly  de- 
liveries of,  238;  analysis  of  profits  of  build- 
ers of,  239;  profits  of  contractors  on  a  §4,000 
fixed-price  basis.  241-242,  246,  248,  261,  348. 

Lincoln  Motor  Company,  238,  240-241. 

Liquidation:  summary  of  features  of,  309; 
termination  of  contracts  and  orders  in  public 
interest,  307;  District  War  Claims  Boards, 
vii.  315-316,  320;  supplemental  contracts  for 
settling  claims,  308;  problems  of  settling,  288; 
Philadelphia  District  Claims  Board,  318,  321. 

Liquidation  Commission,  351. 

Littell,  Colonel  I.  W.,  78,  88. 


Lord,  General  H.  M.,  288. 

Lovett,  Judge  R.  S.,  50. 

Lumberman's  Protective  League,  258. 

Lump  sum  awards:  hazards  of,  s;  under  com- 
petitive contracts,  33;  definition  of,  36;  to 
Baldwin  Locomotive  Works,  46;  in  shipbuild- 
ing, 148;  of  Emergency  Fleet  Corporation, 
188,  228;  payments  under,  189,  193-194. 

March,  General  R.  C,  76. 

McGowan.  Admiral  Samuel,  139,  153. 

Medical  Department  (Corps) :  expenditures  of, 
9;  consolidation  of  purchases  of,  70;  high  con- 
tracting standard  of ,  72 ;  appropriations  for,  73. 

Merchant  shipbuilding.     See  Shipbuilding. 

Merchant  Shipbuilding  Corporation  (Bristol), 
183,  185,  214-215,  217-218. 

Midvale  Steel  and  Ordnance  Company,  132,  330. 

Military  Aviation  and  Aeronautics,  expendi- 
tures for,  9. 

Militarj'  Intelligence  Branch,  72. 

Monoher,  General  Charles  T.,  252. 

Munitions  Board  (Council  of  National  Defense), 
58,  78,  273. 

Munitions  Department,  10,  52. 

Munitions,  Director  of,  105,  112,  131,  290. 

Munitions  Manufacturers'  Tax  (Act),  189,  340. 

National  Defense  Act,  6;  formulation  of  govern- 
ment pohcy  toward,  13;  special  application  of, 
to  contract  conditions  as  related  to  purchase 
of  suppUes  and  production  of  munitions,  15- 
22;  legalization  of  cost-plus  contracts  by,  32; 
provision  for  increase  in  personnel  of  Ord- 
nance Office,  25,  34;  commandeering  authority 
conferred  by,  45-46,  53,  86,  334. 

Naval  contracting:  commandeering  contract, 
44;  building  program,  77,  135;  prewar  use  of 
cost-plus  contracts,  137;  pioneering  risks  in 
naval  production,  139;  cost-plus  contract  a 
war  time  expedient,  140;  cost  and  compensa- 
tion provisions  in  standard  naval  contract, 
146;  Compensation  Board,  149;  price  policy 
in,  151;  transition  to  allocation  of  contracts, 
157;  comparative  extent  of  allocation  and 
competition,  157;  features  of  standard  yards 
and  docks  contract,  159;  specifications  and 
provisions  in  standard  contracts,  162;  changes 
in  plans  and  specifications  and  delays,   165. 

Navy  Board  of  Appraisal  and  Condemnation, 
43.  47. 

Navy  Bureau  of  Construction  and  Repairs,  135, 
141,  143,  159- 

Navy  Bureau  of  Supplies  and  Accounts,  44,  67, 
135.  138,  144.  150-151.  154.  345. 

Navy  Bureau  of  Yards  and  Docks,  77,  159,  162, 
164-166,  278. 

Navy  Department:  appropriations  for,  10;  chief 
contractual  operations  of,  135;  cardinal  prin- 
ciple of  cost  control  in,  144.  See  also  Xaval 
contracting. 

Navy  Ordnance  Bureau,  350. 

Newark  Shipyard.  See  Submarine  Boat  Cor- 
poration. 

New  London  submarine  base,  159,  163,  166. 

Newport  News  Shipbuilding  and  Dry  Dock 
Company,  141. 

New  York  Merchants'  Association,  309. 

New  York  Shipbuilding  Corporation,  203,  210. 

Nordyke  and  Marmon  Company,  238,  241. 

Ocean  Advisory  Commission  on  Just  Compen- 
sation, 201. 

Ordnance  Claims  Board,  314;  schedule  of 
functions  of,  317,  320,  331. 

Ordnance  contracts,  analysis  of  principal  fea- 
tures of.  107-10S;  cancelation  of,  113;  con- 
trol of  costs  in,  116;  four  essential  factors  in 
cost-plus  contracts,  116. 


356 


INDEX 


Ordnance  Department:  expenditures  of,  9; 
increase  in  personnel  of,  34;  methods  of  get- 
ting supplies,  45;  relative  importance  of,  96; 
situation  at  outbreak  of  war.  9S;  contract 
procedure  in,  100;  strategic  importance  of 
America's  ordnance  problem,  102;  reorgani- 
zation of.  as  affecting  contracts,  104;  methods 
of  controlling  materials  and  deliveries,  109; 
payments,  priorities  and  inspection,  110; 
inspection  standards  and  emergency  produc- 
tion, III. 

Ordnance  Manufacturing  Policy,  Kernan  report 
on,  14,  46, 

Otis  Elevator  Company,  306. 

Overman  Act,  7,  16,  iS. 

Packard  Motor  Car  Company,  238,  239. 

Panama  Canal,  73.  77,  180. 

Peace  time  contracting,  general  features  of,  4. 

Pershing,  General  John  J.,  231-232.  293. 

Philadelphia  District  Claims  Board,  318,  321. 

Piez,  Charles,  216. 

Poindexter  bill.  32. 

Price  fixing,  16,  42,  45;  testimony  of  General 
Goethals  on,  69,  152;  development  of  princi- 
ples of.  34S- 

Priority  Board,  SO- 

Procedure,  contracting:  statutorv-  principles  of, 
13;  war  time  purchase  methods  and  priorities, 
13;  Kernan  report  on  ordnance  manufactur- 
ing policy,  14;  contract  control  in  Food  and 
Fuel  Act,  is;  provision  of  Overman  Act  to 
prevent  collusion,  control  speculation  and  fix 
prices,  16;  theory  of  government  war  con- 
tracting, 18;  administrative  principles  of,  19; 
formal  requirements  of  a  valid  contract,  19; 
contracting  officer  disclaims  interest  under 
oath,  20;  advertising  for  proposals  standard 
procedure,  21;  elimination  of  contract  broker 
with  contingent  fees,  22;  purchasing  through 
jobbers  discountenanced,  22;  joint  powers  of 
purchase  and  industrial  control,  25;  contract 
procedure  in  Army  Ordnance  Office,  100. 

Procurement  orders,  11,  19;  prewar  use  of,  by 
Engineer  Corps,  31,  33.  63.  iiS,  313- 

Production,  aircraft,  28, 

Production  Division  (Ordnance  Department), 
121. 

Profiteering,  42,  90,  150,  152,  154.  223,  240,  262. 

Profits:  camps,  75;  aircraft,  239,  244;  federal 
taxes  on,  340. 

Provost  Marshal  General,  9- 

Purchase  and  Supply  Branch  (Division  of 
Purchase,  Storage  and  Traffic),  25,  32,  66. 

Quartermaster     Corps:    expenditures    of,     10; 

relative  importance  of,  63 ;  disposal  of  surplus 

of,  297. 
Quartermaster  General's  Office,  28;  expenditures 

of,  63;  prewar  reorganization  of,  64. 
Quistconk,  347. 

Ray,  Justice,  44. 

Remington  Arms  Company,  125, 

Results,  economic,  342. 

Requisitioned  orders,  33. 

Requisitioning.     See  Commandeering. 

Returns  Office  (Department  of  the  Interior), 
19,  20. 

Revenue  Act  (October  3.  I9i7),  34i- 

Rifles:  expenditures  for,  96,  121;  factors  affect- 
ing cost-plus  contracts,  122;  why  the  modified 
Enfield  rifle  was  adopted,  123;  insistence  of 
rifle  contractors  on  cost-plus  contracts,  125; 
rifle  production  record  of  the  government,  130; 
comparative  output  of  rifles  under  cost-plus 
contracts,  131;  record  of  Eddystone  rifle 
plant.  132,  297,  310. 

Rock  Island  Arsenal,  15.  122,  130,  283. 


Rolls-Royce  Motors,  233. 
Roosevelt,  Colonel  Theodore,  233. 

Schlacks,  Charles  H.,  130. 

Sharpe,  General  II.  G.,  28. 

Shipping  Board.  See  United  States  Shipping 
Board. 

Shipbuilding  and  repairing,  141;  cost-plus  con- 
tracts in,  148;  four  divisions  of  operation,  181; 
general  policy  of  ship  contract  compensation, 
18s;  principle  of  payment  in  agency  contracts, 
186;  lump  sum  contracts,  188;  analysis  of 
shipbuilding  contracts,  189;  payments,  189; 
plant  financing  extensions  and  real  estate, 
194;  subcontracts  and  control  in  construction, 
19s;  contractual  arrangements  for  requisi- 
tioned ships,  200;  control  of  chartering  req- 
uisitioned ships,  201;  effects  of  ocean  freight 
control  on  shipyard  conditions,  202;  requisi- 
tioning of  incomplete  ships,  203;  contractors' 
fees  in  fabricated  shipbuilding,  209;  criticism 
of  agency  compensation  system,  211;  com- 
parative fees  at  three  fabricating  yards,  217; 
subcontracting  on  plant  construction.  220; 
public  distrust  of  big  business  methods,  223; 
policy  and  practice  in  wooden  ship  contracts, 
227,  229;  elements  of  reaction  and  delay  on 
contracts,  228;  economic  results  of  shipbuild- 
ing program,  347. 

Shipping  Act  (1916),  169,  171-172. 

Shipping  Control  Committee  (United  States 
Shipping  Board),  201. 

Shipyard  housing,  extent  and  results  of,  265. 

Siems-Carey-Kerbaugh  Corporation,  259,  262. 

Signal  Corps,  7;  expenditures  of,  9,  28,  49-50, 
68,  232,  245,  247-249, 

Sligh,  Major  Charles  R.,  256-257,  260. 

Sloan  Shipyards  Corporation,  192-193. 

Spad  airplanes,  247. 

Springfield  Arsenal,  122,  130. 

Springfield  rifles,  122-124,  132. 

Spruce  production:  commandeering  of,  49,  229; 
conditions  surrounding  spruce-fir  contracts, 
253;  first  and  second  stages  in,  256-257. 

Spruce  Production  Division,  256,  258,  260. 

Squier,  General  George  O.,  50. 

Standard-J  airplanes,  245. 

Standardization,  efforts  at,  37- 

Starrett,  Major  W,  A.,  92. 

State,  Department  of,  175. 

Stayton,  Colonel  Norris,  299. 

Subcontracting:  provision  for,  84,  115;  in  ship- 
building contracts,  189,  219,  221;  in  lump 
sum  contracts,  195;  on  plant  construction, 
220;  in  airplane  spruce  production,  262;  in 
housing  contracts,  272;  classification  in 
liquidation,  328. 

Submarine  Boat  Corporation  (Newark),  183, 
185,  214-215,  217-218. 

Submarine  boats,  141,  148,  168. 

Submarine  chasers,  141,  217. 

Superior  Board  of  Contract  Review,  71. 

Supply  system,  peace  time  and  war  time  cost  of, 
12;  organic  principle  of  governmental  supply 
system,  23;  prewar  prevalence  of  bureau 
supply  system,  24;  belated  event  of  consoli- 
dated supply  service,  29;  army  supply  offices 
hindered  by  peace  time  forms,  34;  reorganiza- 
tion of  army  supply  system,  64;  official  recog- 
nition of  failure  of  bureau  supply  system,  6s; 
defects  of  bureau  system  in  theory  and  prac- 
tice, 67;  purchase  procedure  under  reorgan- 
ized system,  69. 

Sweeney,  Captain  Thomas  A.,  258. 

Talbot  Commission,  88. 
Tanks,  231. 

Taxes:  on  war  contracts,  340;  Munitions  Manu- 
facturers' Tax,   189,  340, 


INDEX 


357 


Thomas,  Senator  Charles  F.,  vii. 

Tonnage:  contracted  for,  176-177;  requisitioned 

by  Emergency  Fleet  Corporation,  203-205, 

208-210, 213-217. 
Trigg,  Ernest  T.,  104. 

United  States  Chamber  of  Commerce,  59. 

United  States  Circuit  Court,  18. 

United  States  Housing  Corporation,  vii,  8;  ex- 
penditures of,  on  account  of  contracts,  10, 
78;  building  program,  78;  creation  and  organi- 
zation of,  26s;  contractors'  fees  in  projects  of, 
268-269;  methods  employed  in  selection  of 
contractors,  270-271,  273;  geographical  scope 
and  varied  character  of  worlc  of,  27s;  work  of 
the  Cost  Engineering  Section,  278,  280-283; 
effect  of  armistice  on  contractual  arrange- 
ments and  policy  of,  284-286. 

United  States  Shipping  Board,  vii,  8;  expendi- 
tures of,  10,  II,  37,  40,  78;  building  program, 
78;  appropriations  for  and  wide  extent  of 
contracting  powers,  169;  elaboration  of  pro- 
gram, 1 71-173;  effect  of  outbreak  of  war 
on  building  operations,  174-175;  authoriza- 
tions, commitments  and  expenditures,  178; 
policy  under  war  time  conditions,  179-181; 
commandeering  powers,  181,  184;  contractual 
policy,  185,  196;  ships  requisitioned  by,  198- 
1 99 ;  contractual  arrangementsf  orrequisitioned 
ships,  200;  creation  of  Chartering  Committee, 
202;  requisitioning  of  incomplete  ships  by, 
203,  205-206,  208,  214;  position  of,  in  contro- 
versy regarding  Hog  Island  contract  fee,  215, 


223,  224;  policy  and  practice  of,  as  regards 
wooden  shipbuilding,  227,  230,  254,  289,  348. 

Volume  of  contract  operations,  8. 

Wages:  camp  construction,  89;  housing  con- 
tracts, 273-274. 

War  contract  profits,  federal  taxes  on,  340. 

War  Credits  Board,  237,  261,  339. 

War  Department,  expenditures  of,  9-10. 

War  Department  Claims  Board,  314. 

War  expenditures.  Select  Committee  of  the 
House  on,  55,  68.  102,  232,  252,  288,  293. 

War  Finance  Corporation,  339. 

War  Industries  Board,  21,  25;  War  Department 
representation  on,  26;  contractual  functions 
of,  29-30;  advisory  control  of  contracts  in, 
58-59;  severance  from  Council  of  National 
Defense,  61,  69-70,  loi;  procedure  in  rela- 
tions of,  to  Ordnance  Department,  102,  T04. 
13S.  152,  155,  157.  243,  273,  318,  335.  344.  350. 

War  Munitions  Board,  59. 

War  Purchasing  Board  (Council  of  National 
Defense),  58. 

War  time  contracting,  basic  factors  in,  6. 

West,  Ex-governor,  256. 

Winchester  Repeating  Arms  Company,  125. 

Witteman-Lewis  Aircraft  Company,  234. 

Woodhouse,  Henry,  250. 

Wooden  ships.  See  Shipbuilding  and  repair- 
ing. 

Wright-Martin  Aircraft  Corporation,  233,  245, 
249. 


It^c 


DATE  DUE 

1 

NOV 

psco  m 

)V  9      1982 

I^VB  [ 

\ '/  5985 

S88i  T 

HVN  Q31U 

tMfinUl 

^SSARY  LOi 

\m 

R^y 

1 5  im 

MAF 

1 6  19^' 

I 

1 

GAVLORD 

PRINTED  IN  U    S    A 

3  1970  00565  6308 


UC  SOUTHERN  1 

AA    000  594  52/    4 


